Preproposal statement of inquiry was filed as WSR 06-11-181.
Title of Rule and Other Identifying Information: Amendatory sections WAC 458-12-005 Definition -- Property -- Personal and 458-16-115 Personal property exemptions for household goods, furnishings, and personal effects, and for the head of a family; and new sections WAC 458-50-150 Intangible personal property exemption -- Introduction, 458-50-160 Exempt intangible property distinguished from other intangibles, 458-50-170 Valuation principles, 458-50-180 Appraisal practices relating to valuing intangible personal property, and 458-50-190 Valuation of particular assets.
Hearing Location(s): Capital Plaza Building, 4th Floor Executive Large Conference Room, 1025 Union Avenue S.E., Olympia, WA, on September 6, 2006, at 9:30 a.m.
Date of Intended Adoption: November 10, 2006.
Submit Written Comments to: James A. Winterstein, P.O. Box 47471, Olympia, WA 98504-7471, fax (360) 586-7602, e-mail JimWi@dor.wa.gov, by September 6, 2006.
Assistance for Persons with Disabilities: Contact Sandy Davis at (360) 725-7499 no later than ten days before the hearing date. Deaf and hard of hearing individuals may call 1-800-451-7985 (TTY users).
Purpose of the Proposal and Its Anticipated Effects, Including Any Changes in Existing Rules: The department proposes five new rules proposed to be added to chapter 458-50 WAC, Intercounty utilities and transportation, dealing with valuation of state-assessed utility companies. The purpose of the rules is to clarify the statute (RCW 84.36.070) and assist taxpayers, the department, and assessors in consistently applying the exemption for intangible personal property. The department also proposes to revise one rule in chapter 458-12 WAC, Rules for assessors, and another in chapter 458-16 WAC, Exemptions, to reference these new rules. Note: The department anticipates conducting a 2nd CR-102 public hearing after taking and considering comments regarding this proposed rule.
Reasons Supporting Proposal: The statute exempting intangible personal property, RCW 84.36.070, was substantially amended in 1997 and no rules have been adopted since then to clarify what the exemption entails. These rules are intended to provide all interested parties with guidelines used by assessing officials relative to the exemption of intangible personal property.
Statutory Authority for Adoption: RCW 84.08.010, 84.08.070, and 84.36.865.
Statute Being Implemented: RCW 84.36.070.
Rule is not necessitated by federal law, federal or state court decision.
Name of Proponent: Department of revenue, governmental.
Name of Agency Personnel Responsible for Drafting: James A. Winterstein, 1025 Union Avenue S.E., Suite #200, Olympia, WA, (360) 570-5880; Implementation and Enforcement: Brad Flaherty, 1025 Union Avenue S.E., Suite #200, Olympia, WA, (360) 570-5860.
No small business economic impact statement has been prepared under chapter 19.85 RCW. A small business economic impact statement is not required for the reason that the rules do not impose any new performance requirement or administrative burden on any small business.
A cost-benefit analysis is not required under RCW 34.05.328. The proposed rules are not significant legislative rules as defined by RCW 34.05.328.
August 2, 2006
Alan R. Lynn
WAC 458-50-150 Intangible personal property exemption -- Introduction. (1) Goal of these rules relative to exemption of intangible personal property. Although the Washington Constitution allows for property taxation of all property subject to ownership, "whether tangible or intangible," the legislature has exempted some intangible property from property taxation for many years. In 1997, the legislature expanded the exemption for intangible personal property and provided examples of exempt property. The following rules are intended to provide additional clarification of the statute and provide guidelines to be used by assessing officials in determining the taxable value of property. The goal is to ensure, in as fair and equitable a manner as possible, that all taxable value is assessed and all nontaxable value is not assessed.
(2) Application of these rules. These rules primarily implement RCW 84.36.070, which establishes a property tax exemption for intangible personal property, but also apply to chapters 84.12 and 84.16 RCW, the statutory chapters dealing with the assessment of public utility, and private car company property, respectively, by the state, and to chapter 84.40 RCW, which deals with assessment of property by the county assessor.
(2) What intangible personal property is exempt? The listings of examples of intangible personal property contained in RCW 84.36.070(2) must be consulted, but those listings can be summarized as follows:
(a) Financial intangible property, such as moneys, credits, and publicly issued bonds and warrants, and the bonds, stocks, or shares of private corporations;
(b) Private personal service contracts and athletic or sports franchises, or sports agreements that do not pertain to the use or possession or any interest in tangible personal or real property; and
(c) Miscellaneous types of intangible personal property, such as trademarks, trade names, brand names, patents, copyrights, trade secrets, core deposits of financial institutions, noncompete agreements, customer lists, patient lists, favorable contracts, favorable financing agreements, reputation, exceptional management, prestige, good name, integrity of a business, and other similar types of intangible personal property. Franchise agreements, licenses, and permits that are wholly between private parties are exempt intangible personal property. (Licenses, permits and franchises granted by a government agency are referred to in subsection (5)(b) of this section.)
(3) Is "goodwill" exempt intangible personal property? "Goodwill" is an accounting classification that recognizes the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed, but "goodwill" does not identify specific property to which this classification refers. Therefore, "goodwill" as an unidentified, or otherwise unspecified, residual account is itself not exempt intangible personal property. However, to the extent that components or elements of the "goodwill" residual account can be separately identified and valued by a traded market, they are exempt.
(4) Identifying exempt intangible personal property. Intangible property is only exempt if it is personal property capable of being individually owned, used, transferred, or held separately from other property. The market value of separate items of intangible personal property should not be identified or characterized solely using residual accounting methods, or other indirect techniques, such as isolating "excess earnings," from a total business valuation. Market value of exempt intangible personal property should be verifiable in an openly traded market where the value of comparable intangible properties can be observed and considered.
(5) What intangible characteristics, attributes or other factors affect value and may be considered? Nonproperty intangible characteristics or attributes are elements or components of value associated with a real or tangible asset. These characteristics or attributes are "intangible" but they are not "property" and therefore are not tax exempt intangible personal property. They are contingent and dependent upon other property and cannot be owned, used, transferred, or held separately from other property. To the extent that these characteristics, attributes, or other factors contribute to, or affect, the value of property, they must be appropriately considered when determining taxable value. They include the following types:
(a) Zoning, location, view, geographic features, easements, covenants, proximity to raw materials, condition of surrounding property, proximity to markets, or the availability of a skilled work force;
(b) Grants of licenses, permits, and franchises by a government agency that affect the use of the property being valued; and
(c) Other characteristics of property, such as scarcity, uniqueness, adaptability, or utility as an integrated unit or going concern.
(2) Approaches to value. All three traditional and generally accepted approaches to value may be used by assessing officials. These approaches are cost, including the actual cost new or historical cost less depreciation, the cost of reproduction new less any depreciation and plus any appreciation; income, including the past, present, and prospective gross and net earnings of the whole system as a unit; and market, including the par value, actual value and market value of the company's outstanding stocks and bonds during one or more preceding years.
(3) Generally accepted appraisal practices. "Generally accepted appraisal practices" are the appropriate application in the valuation of real, and tangible and intangible personal property, of accepted standards of professional appraisal practice as described in the Uniform Standards of Professional Appraisal Practice issued by the Appraisal Standards Board of the Appraisal Foundation or the accepted standards of other nationally recognized professional appraisal organizations.
(2) Situs, allocation, and apportionment. Property taxes may only be levied upon property having situs in this state, in other words, upon property located in this state. The process of dividing up the unit value of a company among the states where it has a presence is called allocation. The process of dividing up the allocated state value among the taxing jurisdictions within a state is called apportionment. Once the taxable value, meaning the total value of a company's operating property in this state less the exempt value, has been determined, the taxable value is apportioned as required by law.
(3) Valuation of exempt intangible personal property. Assessing officials may use one of two methods, as appropriate, to determine the value of intangible personal property that is exempted from a company's unit value. The first method is the method by which the true and fair value of the exempt intangible personal property is deducted from the true and fair value of the operating property at the system level to arrive at taxable value at the system or entity level. The second method is the method by which the true and fair value of exempt intangible personal property is excluded from the value of the operating property at the system level by using a valuation model that approximates the value of the nonexempt assets only. These two methods are explained in more detail as follows.
(a) The first method is a two step-process that involves valuing the entire company operation, the unit, as the first step, using any or a combination of the three traditional approaches to value. Then the exempt property is separately identified, valued, and deducted from the unit value. In valuing the exempt property, assessing officials use generally accepted appraisal practices, including sales of similar intangible personal property, capitalization rates obtained through those sales, or by identifying cash flows attributable to each intangible personal property asset. When using this method, the value resulting from deducting the exempt value of intangible personal property from the entire company value, is the taxable value at the system or entity level. From that value, the proper value must then be allocated to this state and apportioned to the local taxing jurisdictions by law.
(b) The second method involves an appraisal process using an appraisal model that intrinsically approximates the exclusion of exempt intangible value. This process assumes the existence of intangible personal property in the overall value of the company being valued, but does not specifically identify or value individual intangible personal property assets. Although the model may not actually exclude the value of exempt intangible personal property, it simulates the effect of exempting intangible personal property by producing a lower assessed value equivalent to the exclusion of exempt intangible property. When an assessing official uses this method, he or she must also make a reasonable effort to compare the valuation result reached with the valuation result reached by the method described in (a) of this subsection and place the most consideration and reliance on the value indicator which, in his or her professional judgment, best approximates the taxable value of the company. A showing of a reasonable effort means, at a minimum, documentation of the comparison of the results of both methods.
(4) Unit value at the county level. When a business operates in more than one location within a county, but is physically, economically, and functionally integrated, it may also be valued by the assessor as a unit. However, properties that share a name, for example, but are independently operated, such as bank branches, retail outlets, or hotels or motels that are part of a chain, they should generally be valued as stand-alone enterprises, and not as physically, economically, and functionally integrated units. An assessor should consider the unit being assessed to be the same unit a typical purchaser would consider in an openly traded market. If the property being assessed would typically be purchased as a stand-alone and independent operation without reference to a larger entity, then that is how it should be assessed. If the property being assessed would typically be included in the purchase of a larger entity, then the assessor should consider the influence on value that being included within the larger unit would have on the property being assessed.
(2) In valuing low income or other housing which qualifies for federal income tax credits, those tax credits are exempt from property taxation when they exist separate from the ownership right in the housing and when they are not inextricably linked to the real property.
AMENDATORY SECTION(Amending Order PT 68-6, filed 4/29/68)
WAC 458-12-005 Definition -- Property -- Personal. The terms "personal property" and "real property" are defined in RCW 84.04.080 and 84.04.090, respectively. These definitions should routinely be consulted in any case where it is at all doubtful whether a given piece of property is real or personal.
Personal property, as defined in RCW 84.04.080, falls into two categories; namely, tangible personal property, that is to say, things which have a physical existence, and intangible personal property which consists of rights and privileges having a legal but not a physical existence. The category of tangible personal property includes but is not limited to the following:
(1) Goods and chattels. RCW 84.04.080. This category includes most tangible movables, such as
(a) Inventories, AGO 57-58, No. 206 (1958);
(b) Farm machinery, AGO 1909-1910, p. 51;
(c) Livestock and poultry, RCW 84.44.060;
(d) Logs and lumber, RCW 84.44.030;
(e) Motor vehicles, RCW 84.44.050;
(f) Books, Booth & Henford Abstract Company v. Phelps, 8 Wash. 549 (1894);
(g) Coin collections and coin inventories of coin dealers, AGO 63-64, No. 116 (1964);
(2) All standing timber held or owned separately from the ownership of the land on which it stands, RCW 84.04.080; Leuthold v. Davis, 56 Wn.2d 710 (1960).
(3) All fish traps, pound net, reef net, set net and drag seine fishing locations, RCW 84.04.080.
(4) All privately-owned improvements, including buildings and the like, upon publicly owned lands which have not become part of the realty, RCW 84.04.080; Pier 67, Inc. v. King County, 71 W.D.2d 89 (1967); AGO 1935-1936, p. 167; AGO 3-25-52; TCR 6-17-1947.
(5) All gas and water mains and pipes laid in roads, streets or alleys, RCW 84.04.080.
(6) Water craft of all descriptions, RCW 84.04.080, Black v. State, 67 Wn.2d 97 (1965), provided they have acquired an actual situs in the taxing county pursuant to RCW 84.44.050.
(7) Foxes, mink, marten, fish, oysters and all other animals held or raised in captivity for business or commercial purposes, including livestock. RCW 16.72.050; AGO 4-16-1900; AGO 1927-1928, p. 88; TCR 1-6-36.
(8) The roads and bridges of plank roads, gravel roads, turnpike or bridge companies. RCW 84.44.040.
(9) Trade fixtures. This concept, which is peculiar to the landlord-tenant relationship, refers to the machinery or equipment of any commercial or industrial business which operates on leased land or in rented quarters. Such machinery or equipment is a trade fixture; i.e., the tenant's personal property, no matter how firmly it may be attached to the landlord's realty, unless it could not be removed without virtually destroying the building housing it, or otherwise seriously damaging the landlord's realty. Brown on Personal Property (2d Edition 1955), Sec. 144.
(10) All engines and machinery of every description used or designed to be used in any process of refining or manufacturing, unless such engines and machinery shall have been included as part of any parcel of real property as defined in WAC 458-12-010(3).
(11) All buildings and other permanent improvements constructed or placed upon the easements of public service corporations other than railroads.
(12) All surface leases, whether of public or privately-owned land, except leases for the life of the lessee. RCW 84.04.080; AGO 49-51, No. 476 (1951); TCR 8-8-41: In Re Barclay's Estate, 1 Wn.2d 82 (1939). This category includes practically all leases to corporations because the legal life of a corporation is almost always longer than the term of any lease to it. Pier 67, Inc., v. King County, 71 W.D.2d 89 (1967).
Intangible personal property includes but is not necessarily limited to the following:
(1) Contract rights to cut timber on either public or privately-owned land under which title to the timber has not yet passed. AGO 53-55, No. 29 (1953); PTB 222 (1-13-53). A contract right to cut timber is a mere license, and all contractual licenses to use someone else's realty are personal property. See WAC 458-12-005 (5-Intangibles).
(2) All mining claims, whether patented or unpatented, which are located on public land. TCR 10-3-35; TCR 4-4-1950; AGO 55-57, No. 327 (1956); American Smelting and Refining Company v. Whatcom County, 13 Wn.2d 295 (1942).
(3) All mining or prospecting leases, whether on public or privately-owned land, except leases for the life of the lessee. RCW 84.04.080; TCR 4-22-36; Walla Walla Oil, Gas & Pipe Line Company v. Vallentine, 103 Wash. 359 (1918).
(4) All contractual licenses to use public or someone else's land for specified purposes, or to take something from public or someone else's land, which have a specified minimum term. Examples: Timber contracts, AGO 53-55, No. 29, (1953); oil and gas prospecting permits, Walla Walla Oil, Gas & Pipe Line Company v. Vallentine, 103 Wash. 359 (1918); grazing permits; permits to take gravel or other minerals, TCR 4-22-1936. However, a license or permit which is revocable at the will of the landowner is not property at all because it gives the licensee no legally-protected right or interest whatsoever.
(5) All possessory rights in realty which are divorced from the title to the realty. TCR 10-3-35; AGO 1937-1938, p. 353. Such possessory rights are analogous to leases; hence they are personal property unless they are coextensive with the life of their holder. This category includes the possessory interest which an installment contract for the sale of public or privately-owned land creates in the vendee. See RCW 84.40.230.
(6) Public utility franchises owned by public service corporations. A public utility franchise is the right to use publicly owned real estate for power lines, gas or water lines, sewers or some other public utility facility. Commercial Electric Light and Power Company v. Judson, 21 Wash. 49 (1899); Chehalis Broom Company v. Chehalis County, 24 Wash. 135 (1901). Such public utility franchises are very similar to public utility easements, which are personal property under Paragraph 8 thereof. However, a Washington corporation's primary franchise to exist and do business in corporate form is not taxable property. Bank of Fairfield v. Spokane County, 173 Wash. 145 (1933).
(7) Public utility easements owned by public service corporations other than railroads. RCW 84.20.010.
(8) See WAC 458-50-150 through 458-50-190 for rules relating to exemption of intangible personal property under RCW 84.36.070.
[Order PT 68-6, § 458-12-005, filed 4/29/68.]
AMENDATORY SECTION(Amending WSR 02-19-004, filed 9/4/02, effective 10/5/02)
WAC 458-16-115 Personal property exemptions for household goods, furnishings, and personal effects, and for the head of a family. (1) Introduction. This rule explains the personal property tax exemption for household goods, furnishings, and personal effects. It also explains the exemption available to the head of a family for otherwise taxable personal property up to a value of three thousand dollars. These exemptions are provided by RCW 84.36.110. (For rules dealing with exemptions of intangible personal property under RCW 84.36.070, see WAC 458-50-150 through 458-50-190.)
(2) Exemption for household goods, furnishings, and personal effects. All household goods and furnishings actually being used to equip and outfit the owner's residence or place of abode and all personal effects held by any person for his or her exclusive use and benefit are exempt from property taxation. Any household goods and furnishings or personal effects held for sale or commercial use do not qualify for this exemption. RCW 84.36.110(1).
(a) What are household goods and furnishings? "Household goods and furnishings" are all items of tangible personal property normally located in or about a residence and used or held to enhance the value or enjoyment of the residence, including its premises. The phrase includes, but is not limited to, movable items of necessity, convenience, or decoration, such as furniture, appliances, food, pictures, and tools and equipment used to maintain the residence. Personal property qualifying for this exemption retains its exempt status while temporarily in storage or while being used temporarily at locations other than the owner's residence.
"Household goods and furnishings" do not include items of personal property constructed primarily for use independent of and separate from a residence such as boats, motor vehicles, campers, and travel trailers. However, certain motor vehicles, campers, and travel trailers may be entitled to an exemption from property taxation under RCW 84.36.595. Also, some boats may be wholly or partially exempt from property taxation under RCW 84.36.080 and 84.36.090.
(b) What are personal effects? "Personal effects" are items of tangible property of a personal or intimate nature that usually and ordinarily accompany a person such as wearing apparel, jewelry, and articles of a similar nature. RCW 84.36.120.
(c) When are household goods, furnishings, and personal effects not exempt? Personal property held for sale or used for any business or commercial purpose does not qualify for the household goods exemption. Thus, property used to equip and outfit a motel, hotel, apartment, sorority, fraternity, boarding house, rented home, duplex, or any other premises not used by the owner for his or her own personal residence or place of abode does not qualify for this exemption. Likewise, a hairdresser who uses any portion of his or her home as a beauty salon cannot claim a household goods exemption for personal property held for sale or otherwise used in the business. Business inventories, however, are exempt from property taxation under RCW 84.36.477.
Following is a nonexclusive list of items that are exempt as household goods or furnishings if they are used in a residence or place of abode but are fully taxable if they are used for business or commercial purposes.
(i) Desks are exempt as household goods if they are used in a residence but are taxable if they are used in a business office, including an office located in the owner's residence.
(ii) Silverware and china are exempt if they are used in a residence but are taxable if they are used in a restaurant.
(iii) Art or other collections are exempt if they are located in a residence but are taxable if they are located in a public display or used for commercial purposes.
(iv) Power equipment such as lawnmowers used exclusively to enhance the value or enjoyment of a residence, including its premises, are exempt, but they are taxable when used to maintain a golf course or for any other business or commercial purpose.
(3) Exemption for the head of a family. Each head of a family is entitled to an exemption from his or her taxable personal property in an amount up to three thousand dollars of actual value. RCW 84.36.110(2). For purposes of this exemption, "actual value" has the same meaning as "true and fair value" as defined in WAC 458-07-030. The taxpayer must qualify for the head of a family exemption on January 1st of the assessment year (the assessment date) or the exemption is lost for taxes payable the following year. As noted above, household goods, furnishings, and personal effects not used for business or commercial purposes are exempt from property taxation; therefore, the exemption for the head of a family does not apply to such property.
(a) Who qualifies as the head of a family? The exemption for the head of a family applies only to individuals (i.e., natural persons); it does not apply to artificial entities such as corporations, limited liability companies, or partnerships. The "head of a family" includes the following residents of the state of Washington:
(i) Any person receiving an old age pension under the laws of this state;
(ii) Any citizen of the United States, over the age of sixty-five years, who has resided in the state of Washington continuously for ten years;
(iii) The husband or wife, when the claimant is a married person, or a surviving spouse not remarried; and
(iv) Any person who resides with, and has under his or her care and maintenance, any of the following:
(A) His or her minor child or grandchild, or the minor child or grandchild of his or her deceased spouse;
(B) His or her minor brother or sister or the minor child of a deceased brother or sister;
(C) His or her father, mother, grandmother, or grandfather, or the father, mother, grandmother, or grandfather of a deceased spouse; or
(D) Any of the other relatives mentioned in this subsection who have attained the age of majority and are unable to take care of or support themselves.
(b) What property is not exempt? The personal property exemption for the head of a family does not apply to the following:
(i) Private motor vehicles. A "private motor vehicle" is any motor vehicle used for the convenience or pleasure of the owner, which carries a licensing classification other than motor vehicle for hire, auto stage, auto stage trailer, motor truck, motor truck trailer, or dealer's license. RCW 84.36.120;
(ii) Mobile homes. A "mobile home" is a trailer designed for human habitation, which is capable of being moved upon the public streets and highways and is either more than thirty-five feet in length or more than eight feet in width. RCW 84.36.120;
(iii) Floating homes. A "floating home" is a building on a float, used in whole or in part for human habitation as a single-family dwelling and is on the property tax rolls of the county in which it is located. A floating home is not designed for self-propulsion by mechanical means or by means of wind. RCW 82.45.032; or
(iv) Houses, cabins, boathouses, boat docks, or other similar improvements that are located on publicly owned land.
(c) 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 status of each situation must be determined after a review of all of the facts and circumstances.
(i) A husband and wife operate a catering business as a limited liability company (LLC). The wife also operates a consulting business as a sole proprietor out of the family home. Husband and wife are not entitled to the head of family exemption for property held by the LLC. However, the wife is entitled to the head of family exemption for the taxable personal property used in her consulting business.
(ii) Jane Doe is a citizen of the United States, over the age of sixty-five, and has resided in the state of Washington continuously for over ten years. Jane owns a farm. She has transferred title to the farm property, both real and personal, into a trust. An attorney is the trustee, and Jane is the sole beneficiary. Since Jane Doe has beneficial ownership of the trust property and she qualifies as the head of a family, Jane may claim the head of a family exemption for the taxable personal property held in the trust.
(4) How do the exemptions included in this rule affect listing? If the county assessor is satisfied that all of the personal property of any person is exempt from taxation, no listing is required by the owner or taxpayer. If the value of taxable personal property exceeds three thousand dollars, then the taxpayer must make a complete listing, and the assessor will deduct three thousand dollars from the total amount of the assessment and assess the remainder. RCW 84.36.110(2).
[Statutory Authority: RCW 84.36.865 and 84.08.070. 02-19-004, § 458-16-115, filed 9/4/02, effective 10/5/02. Statutory Authority: RCW 84.36.110, 84.08.010(2) and 84.36.865. 89-12-013 (Order 89-7), § 458-16-115, filed 5/26/89.]