Washington State Board of Tax Appeals Rules on Sales Tax Exemptions

The Washington State Board of Tax Appeals (BTA) issued a decision on July 25, 2022, in Terrapower, LLC v. Department of Revenue, BTA Docket 19-065 (2022) concluding that a manufacturer doesn’t need to manufacture tangible personal property (TPP) for sale to qualify for the retail sales and use tax exemption on purchases of qualifying machinery and equipment (M&E) used in its research and development (R&D) operation, provided all other requirements are met.

The Washington Department of Revenue (DOR) stated November 9, 2022, that it doesn’t intend to appeal the Terrapower decision.

What This Means for Taxpayers With R&D Operations

The DOR conceded that the M&E sales and use tax exemption for manufacturing and R&D operations doesn’t require that a taxpayer manufacture TPP for sale as an impediment to qualification.

This means that if a taxpayer manufactures TPP for internal commercial or industrial use, such as development of a prototype, and uses M&E in its R&D operation, then the M&E is exempt from sales and use tax, provided the other criteria for the M&E sales and use tax exemption outlined below are also met.

This being a clarification of existing law, there are potential refund opportunities to the extent that taxpayers overpaid sales or use tax on eligible M&E used in an R&D operation.

A refund claim can be filed to recover overpaid sales and use tax on eligible M&E purchased in the last four years plus the current calendar year—namely, 2019 through 2022, plus 2023, as of the date of this alert.

Historical Treatment of M&E Purchases by Manufacturers

Those who manufacture any articles, substances, or commodities for commercial or industrial use are generally eligible to purchase M&E exempt from Washington sales and use tax.

Manufacturing, in this context, refers to applying labor and skill to materials that results in a new, different, or useful article of TPP produced for sale or commercial or industrial use.

M&E generally includes industrial fixtures, devices, support facilities with a useful life of longer than one year, and TPP that becomes a component of said industrial fixtures, devices, or support facilities.

M&E and TPP

M&E must also be used directly in a manufacturing operation, meaning that it must meet any of the following criteria:

  • Acts on or interacts with an item of TPP
  • Conveys, transports, handles, or temporarily stores an item of TPP
  • Controls, guides, measures, verifies, aligns, regulates, or tests TPP
  • Provides physical support for or access to TPP
  • Produces power or lubricates M&E
  • Produces other items of TPP for use in the manufacturing operation
  • Packages TPP
  • Is integral to the discovery of technological information

We’re Here to Help

The clarification of existing law provided in the Terrapower decision is potentially retroactive in nature. If your company manufactures TPP that’s either for sale or for commercial or industrial use, there may be a sales and use tax exemption (or refund) opportunity for M&E used in your R&D operation.

For more information on the sales tax exemption change or its effects on R&D tax credits in Washington State, contact your Moss Adams professional.

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