Title of Rule: WAC 458-20-117 Sales and/or use of dunnage.

Purpose: Rule 117 explains the application of the B&O, retail sales, and use taxes to persons who manufacture and use dunnage.

Statutory Authority for Adoption: RCW 82.32.300.

Statute Being Implemented: RCW 82.04.220, 82.08.020, and 82.12.020.

Summary: This rule is being amended to change and incorrect statutory reference.

Reasons Supporting Proposal: A statutory reference to RCW 82.12.0261 in the second paragraph of subsection (5)(d) needs to be corrected to RCW 82.08.0261.

Name of Agency Personnel Responsible for Drafting: D. Douglas Titus, 711 Capitol Way South #303, Olympia, WA, (360) 664-0687; Implementation: Claire Hesselholt, 711 Capitol Way South #303, Olympia, WA, (360) 753-3446; and Enforcement: Russell W. Brubaker, 711 Capitol Way South #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: The rule explains the B&O, retail sales, and use tax applications to person who manufacture and/or use dunnage. It clarifies that the retail sales or use tax is due on materials initially used for dunnage even though these materials are later resold. Rule 117 also explains that a retail sales tax exemption is available for sales to certain carriers operating in interstate commerce. The rule further explains that manufacturers who use dunnage in transporting goods between their own plants are consumers of those materials.

Proposal Changes the Following Existing Rules: This is an amendment of an existing rule, WAC 458-20-117 Sales and/or use of dunnage. This rule is being revised to change a current statutory reference from RCW 82.12.0261 to the correct RCW 82.08.0261. There is no substantive change to Rule 117.

September 27, 1999

Claire Hesselholt

Rules Manager

Legislation and Policy Division

OTS-3394.1

AMENDATORY SECTION(Amending WSR 93-19-019, filed 9/2/93, effective 10/3/93)

WAC 458-20-117
Sales and/or use of dunnage.

(1) Introduction. This ((section)) rule explains Washington's B&O tax, retail sales tax, and use tax to the sale or use of dunnage.

(a) The term "dunnage" means any material used for the purpose of protecting or holding in place cargo or freight during transportation by any carrier of property, and which is not an integral part of the carrier itself.  Dunnage includes, but is not limited to, wood blocks, stakes, separating strips, timber, double decks, false floors, door shields, bulkheads, and other bracing.  Dunnage generally does not remain with the cargo that is being transported and will not be delivered to the person who will ultimately receive the cargo.  On the other hand, packing materials are generally part of the total package containing the cargo and are ultimately delivered to the customer as part of the cargo or merchandise.

(b) Persons selling dunnage to air, rail, or water carriers operating in interstate or foreign commerce should also refer to WAC 458-20-175.  Persons selling or purchasing packing materials should refer to WAC 458-20-115 (Sales of packing materials and containers).

(2) Business and occupation tax. The B&O tax applies as follows to sales of dunnage.

(a) Wholesaling((--Other)). The wholesaling((--other)) tax applies to the gross proceeds derived from sales of dunnage to persons who resell the dunnage, without intervening use.

(b) Retailing of interstate transportation equipment. This B&O tax classification applies to sales of dunnage to air, rail, and water carriers.  These sales are exempt from retail sales tax because of the provisions of RCW 82.08.0261.

(c) Retailing. The retailing tax applies to sales of dunnage to motor carriers and all other consumers.

(3) Retail sales tax. The retail sales tax generally applies to the sale of dunnage to consumers.  This includes situations in which the purchaser may initially use the materials for dunnage and then resell the materials after they have served that purpose.  RCW 82.08.0261 does provide a retail sales tax exemption for sales of tangible personal property, including dunnage, to air, rail, and water carriers operating in interstate or foreign commerce.  To substantiate a claim for this exemption, the seller must retain as part of its records the completed exemption certificate(s) prescribed by WAC 458-20-175.  However, air, rail, and water carriers are subject to use tax on dunnage used in Washington.  (See below.)

(4) Deferred sales or use tax. If the seller fails to collect the appropriate retail sales tax, the purchaser is required to pay the deferred sales or use tax directly to the department.

(a) Air, rail, and water carriers engaged in interstate or foreign commerce should note that while the purchase of dunnage may qualify for the retail sales tax exemption provided by RCW 82.08.0261, the subsequent use in Washington of that dunnage is subject to use tax.  These carriers should refer to WAC 458-20-175 to determine any potential use tax liability.

(b) Persons who manufacture the materials ((which)) they will use for dunnage, such as lumber manufacturers, are subject to use tax on the value of the dunnage and are also subject to the manufacturing B&O tax.  These persons should refer to WAC 458-20-136 and WAC 458-20-112.

(5) Examples. The following examples identify a number of facts and then state a conclusion.  These examples should be used only as a general guide.  The tax status of each situation must be determined after a review of all ((of the)) facts and circumstances.  Unless stated otherwise, these examples presume both seller and purchaser are located in Washington.

(a) BCD, Inc. provides stevedoring services within the State of Washington.  BCD routinely ((purchases)) acquires lumber for use in securing cargo within the holds of ships during transport.  While this lumber may be bolted or nailed to the ship, it is removed at the destination port when the cargo is off-loaded.  BCD provides the lumber as a part of its overall stevedoring services, and does not make retail sales of the lumber to its customers.

BCD Inc. must pay retail sales tax when purchasing all such lumber.  The lumber is used as dunnage and does not become an integral part of the ship, despite being bolted or nailed to the ship.  If BCD has not paid retail sales tax on the acquisition of the lumber, it must remit the deferred sales or use tax directly to the department.

(b) D Company sells lumber and wood blocks to FG Engineering.  FG is a manufacturer of equipment parts and uses the lumber and wood blocks as dunnage for the transportation of parts by rail to Montana.  The lumber and wood blocks are salvaged and sold by FG after the transportation of the parts is completed.

The sale of the lumber and wood blocks to FG Engineering is a sale at retail, notwithstanding FG resells the dunnage materials in Montana.  The use of the lumber and wood blocks as dunnage by FG Engineering is considered use as a consumer.  D Company must collect and remit the retail sales tax, and report the gross proceeds of the sale under the retailing B&O tax classification.

(c) RB Lumber manufactures lumber in Washington which it ships by rail to customers in other states.  RB Lumber takes irregular sized and other low quality lumber and uses it as dunnage in loading rail cars.  Arrangements have been made with the rail carrier for the dunnage to be given away as firewood at the destination.

RB Lumber is subject to manufacturing B&O tax and also use tax on the value of the dunnage.  If there is a comparable retail selling price for these materials, the value will be determined on that basis.  If there is no comparable selling price, the value may be determined on the basis of cost of production as provided in WAC 458-20-112.

(d) KMB, Inc. sells lumber for use as dunnage to Western Rail, a common carrier operating by rail in multiple states.  Some of the lumber will be first used in Washington and some will be transported to other states without intervening use for use in those states as dunnage.  Western Rail may purchase the dunnage without payment of retail sales tax by giving the seller an exemption certificate as explained in WAC 458-20-175.

KMB, Inc. must report this sale under the retailing of interstate equipment B&O tax classification since Western Rail has claimed exemption for payment of the retail sales tax under RCW ((82.12.0261)) 82.08.0261.  The seller must retain copies of the exemption certificates for five years.  Western Rail must report use tax on the dunnage which is used in Washington.

[Statutory Authority: RCW 82.32.300.  93-19-019, § 458-20-117, filed 9/2/93, effective 10/3/93; Order ET 70-3, § 458-20-117 (Rule 117), filed 5/29/70, effective 7/1/70.]

© Washington State Code Reviser's Office