WSR 98-22-046

EXPEDITED ADOPTION

DEPARTMENT OF REVENUE

[Filed October 30, 1998, 1:46 p.m.]

Title of Rule: WAC 458-20-231 Tax on internal distribution.

Purpose: To explain the internal distribution tax which applies to transfers of tangible personal property from a central location to retail outlets where there is no change of ownership as imposed by RCW 82.04.270.

Statutory Authority for Adoption: RCW 82.32.300.

Statute Being Implemented: RCW 82.04.270.

Summary: This rule explains the conditions under which the tax on internal distributions applies and the acceptable methods for determining the taxable value of articles distributed.

Reasons Supporting Proposal: This rule is being revised to explain that chapter 329, Laws of 1998, repealed the tax on internal distributions effective June 11, 1998.

Name of Agency Personnel Responsible for Drafting: D. Douglas Titus, 711 Capitol Way South, Suite #303, Olympia, WA, (360) 664-0687; Implementation: Claire Hesselholt, 711 Capitol Way South, Suite #303, Olympia, WA, (360) 753-3446; and Enforcement: Russell Brubaker, 711 Capitol Way South, Suite #303, Olympia, WA, (360) 586-0257.

Name of Proponent: Department of Revenue, governmental.

Rule is not necessitated by federal law, federal or state court decision.

Explanation of Rule, its Purpose, and Anticipated Effects: This rule explains the application of the tax formerly imposed by RCW 82.04.270. This tax applied to persons distributing articles of tangible personal property owned by them from their own warehouse(s) or other central location(s) to two or more of their own retail stores or outlets in this state. The rule also provides formulas and methods for calculating internal transfer prices for tax purposes.

Proposal Changes the Following Existing Rules: This is an amendment of an existing rule, WAC 458-20-231 (Rule 231) Tax on internal distribution. This rule is being revised to notify the reader that the tax on internal distributions has been repealed effective June 11, 1998 (chapter 329, Laws of 1998). The department proposes to retain much of the language addressing this tax because the tax does apply within the statutory time-period provided by RCW 82.32.050.

NOTICE

THIS RULE IS BEING PROPOSED TO BE ADOPTED USING AN EXPEDITED RULE-MAKING PROCESS THAT WILL ELIMINATE THE NEED FOR THE AGENCY TO HOLD PUBLIC HEARINGS, PREPARE A SMALL BUSINESS ECONOMIC IMPACT STATEMENT, OR PROVIDE RESPONSES TO THE CRITERIA FOR A SIGNIFICANT LEGISLATIVE RULE. IF YOU OBJECT TO THIS RULE BEING ADOPTED USING THE EXPEDITED RULE-MAKING PROCESS, YOU MUST EXPRESS YOUR OBJECTIONS IN WRITING AND THEY MUST BE SENT TO D. Douglas Titus, Department of Revenue, P.O. Box 47467, Olympia, WA 98504-7467, fax (360) 664-0693, AND RECEIVED BY January 2, 1999.

October 30, 1998

Russell W. Brubaker

Assistant Director

OTS-2446.2

AMENDATORY SECTION (Amending WSR 90-23-020, filed 11/14/90, effective 12/15/90)

WAC 458-20-231  Tax on internal distribution. (1) Introduction. ((The intent of)) Effective July 1, 1998, the tax on internal distribution was repealed by chapter 329, Laws of 1998. Prior to July 1, 1998, RCW 82.04.270 ((is to impose)) imposed a tax equal to the wholesaler's tax upon persons doing functions essentially the same as those of a wholesaler, but not making sales. Persons engaged in the business of distributing articles of tangible personal property owned by them from their own warehouse or other central location in this state to two or more of their own retail stores or outlets in this state ((are)) were taxable under the internal distribution classification of the business and occupation tax. This tax ((applies)) applied to transfers of merchandise from a central location to retail outlets even if the goods ((are)) were preordered and there ((is)) was no inspection or opening of cartons or boxes at or by the central location.

(2) Warehouse or other central location. The term "warehouse or other central location" generally means any facility regardless of the type of activity conducted there, which is operated in this state by a person who distributed tangible personal property from that facility to two or more of his or her own retail stores or outlets.

(a) This term includes any retail outlet no matter how the distributed goods are inventoried or stored at such outlet. The term includes any facility, central distributing point, building, loading platform and adjacent areas operated by the taxpayer where articles of tangible personal property are received and from which they are distributed. Such facilities, distributing points, buildings, platforms and areas are included within the term regardless of how long such property may remain at such places and regardless of the nature of the activity performed at such places with respect to such property.

(b) This term also includes any manufacturing or processing facility operated by the taxpayer from which such distribution is made. The term does not include facilities operated by other persons at which team track deliveries are made into trucks for distribution to retail outlets nor does it include any individual trucks owned by the taxpayer from which deliveries are made at facilities or places not owned by the taxpayer to other trucks for distribution to retail outlets.

(3) Two or more retail stores or outlets. The term "two or more of their own retail stores or outlets" means two or more retail stores operated within this state separate and apart from any "warehouse or other central location." The term does not include a retail store or retail outlet, a part of which is operated as a warehouse from which distribution is made. However, a retail store or outlet will be counted as separate and apart, even though it may be located within the same premises or under the same roof as a warehouse or central location, if it is operated separately, as evidenced for example by separate employee payrolls, accounting records, inventory control, or clearly defined work and retail sale areas. The term does not include trucks or vans used solely for delivery purposes. The term does include trucks or vans from which sales are made at retail such as sales of safety shoes or food through catering vans. The term "retail store or outlet" does not include vending machines or similar devices through which sales are made by coin deposits. However, the term includes business establishments which sell goods to consumers primarily through the use of such devices.

(a) Transfers of merchandise for sale on consignment are not subject to the internal distributions tax when the merchandise is delivered to retail outlets operated by another retailer. Such transfers are not taxable because delivery is not made to the distributors own retail stores or outlets.

(b) Shipments directly to a consumer from a warehouse or central location are not subject to the internal distributions tax even if the billing to the consumer is made from a branch location of the distributor. There must be a physical delivery of the merchandise to the branch location for the internal distributions tax to apply.

(4) Articles of tangible personal property. The term "articles of tangible personal property" means all goods distributed from a warehouse or central location for sale, including particular articles which may be distributed to only one of two or more retail stores or outlets.

(5) Taxable distributions. In cases where the taxpayer sells at both wholesale and retail, the internal distribution tax will not apply with respect to articles distributed for sale at wholesale and upon the sale of which tax will be due under the classification wholesaling--other. (((a))) Articles distributed from independent manufacturers or distributors directly to the taxpayer's retail stores or outlets, or the taxpayer's retail customers are not taxable distributions by the taxpayer. Only the first distribution of seasonal or other goods from a warehouse or central location is taxable, whether or not such goods were originally received in a retail store and later transferred to the warehouse or central location from which taxable distribution is later made.

(6) Determination of the value of the articles distributed. The value of articles distributed shall correspond as nearly as possible to gross proceeds of sales at wholesale in this state by other taxpayers of similar articles of like quality and character and in similar quantities.

(7) Methods for determining taxable value. One of the following methods must be used for determining the taxable value of internal distributions.

(a) Method 1. Cost of production. The value of articles distributed may be computed upon the basis of the cost of manufacturing or producing such articles. In such case there shall be included every item of cost attributable to the particular article or articles manufactured or produced, including direct and indirect overhead costs and the cost of transportation to the local distribution point. In such event tax liability accrues during the period in which the articles are distributed.

(b) Method 2. Purchase price. The value of articles distributed may be computed upon the basis of purchase price including delivery costs of such articles delivered at the local distribution point. The purchase price must include the amount of state and federal excise taxes imposed upon the distributor for the sale, handling or distribution of the articles distributed, whether such taxes are paid by the distributor to his vendor, or are paid by him directly to the taxing body. In such event tax liability accrues during the period in which the articles were purchased, even though the particular articles purchased may not be distributed until a later date. (Not available to those who manufacture or produce the articles distributed.)

(c) Method 3. Invoice price to retail store. The value of articles distributed may be computed upon the basis of charges or memorandum invoices rendered to the retail stores at the time the articles are distributed, providing the amount of such charges or invoices is not less than the cost price of such articles. In computing the cost price, there must be included the amount of state and federal excise taxes imposed upon the distributor for the sale, handling or distribution of the articles distributed, whether such taxes are paid by the distributor to his vendor, or are paid by him directly to the taxing body. In such event tax liability accrues during the period in which the articles are distributed.

(d) Method 4. Retail selling price less 15%. The value of articles distributed may be computed upon the basis of the retail selling price less 15%. In such event tax liability accrues during the period in which the articles are sold at retail.

(e) Method 5. Corresponding wholesale sales. The value of articles distributed may be determined according to the gross proceeds of sales of similar articles of like quality, character and quantity where bona fide wholesale sales are made during the same period, either by the taxpayer or by others, and providing a general standard price is established for such articles during said period. In such event tax liability accrues during the period in which the articles are distributed.

(8) Election to be made. A taxpayer may elect to report upon the basis of any one of the five above methods, providing that the method elected shall be applied to all articles distributed, and after such election is made such taxpayer shall not be permitted to change to any other method without securing the written consent of the department of revenue. Taxpayers who manufacture the product may use method 1 for those products and any one of the other methods for products which they do not manufacture. Intricate or unusual problems concerning determination of the value of articles distributed should be submitted to the department for special ruling. (((a))) The statute ((provides)) provided that the internal distributions tax may not be assessed twice to the same person for the same article. In the absence of separate accounting for articles upon which the tax has or has not been paid, the taxpayer may use percentage formula computed according to a factual segregation of articles distributed for a test period of at least two representative months. Any such formula is subject to approval by the department.

[Statutory Authority: RCW 82.32.300. 90-23-020, § 458-20-231, filed 11/14/90, effective 12/15/90; 83-08-026 (Order ET 83-1), § 458-20-231, filed 3/30/83; Order ET 70-3, § 458-20-231 (Rule 231), filed 5/29/70, effective 7/1/70.]