Two significant Washington research and development tax incentives are set to expire on January 1, 2015: the High Technology B&O Tax Credit for qualified R&D expenditures (“High-Tech Credit”) and the High Technology Sales and Use Tax Deferral on construction of eligible facilities and purchases of qualified machinery and equipment (“High-Tech Deferral”). The expiration of both incentives will have a significant financial effect on qualifying companies. In order to fully take advantage of these incentives before they expire, companies engaged in R&D or pilot scale manufacturing in Washington should carefully review whether their activities might qualify for either benefit prior to December 31, 2014.
Both the High-Tech Credit and the High-Tech Deferral apply to businesses engaged in R&D or pilot scale manufacturing in Washington in at least one of the following fields: advanced computing, advanced materials, biotechnology, electronic device technology, or environmental technology.[1] In order to take advantage of the High-Tech credit, qualifying businesses should simply apply the credit to their B&O tax on their Washington combined Excise Tax Return.
Taking full advantage of the High-Tech Deferral, on the other hand, will require advanced planning on the part of the qualifying business. In order to qualify for the High-Tech Deferral for an eligible investment project, the taxpayer must first submit an application to the Department of Revenue (“DOR”). An eligible investment project is an investment project which either initiates a new operation, or expands or diversifies a current operation by expanding, renovating, or equipping an existing facility in Washington. Notably, an application must be submitted before initiation of construction of a qualifying facility, or acquisition of qualifying machinery.[2] Upon receipt of the application, the DOR has 60 days to review and accept or reject the application. Successful applicants (“recipients”) are issued tax deferral certificates which provide for deferral, and ultimately waiver, if certain requirements are met, of state and local sales and use taxes on the eligible investment project. Recipients must present a copy of the certificate to sellers of goods or retail services provided in connection with the eligible project in order to defer tax on transactions covered by the certificate.
After an application has been submitted, recipients may make written requests to the DOR to amend an application or deferral certificate to increase the available sales tax deferral. Deferred taxes become waived and need not be repaid if the investment project is used only for qualified R&D or pilot scale manufacturing during the year for which the DOR certifies the investment project as “operationally complete” and during the succeeding seven years. An investment project is “operationally complete” when the building, machinery, or equipment is ready for use. If an investment project is used for purposes other than qualified R&D or pilot scale manufacturing during the eight-year period after the deferral certificate is issued, taxes become due immediately, according to a schedule set by RCW § 82.63.045.
In June 2014, the DOR issued guidance regarding the effect of the expiration of the High-Tech Deferral on both businesses currently in possession of deferral certificates and businesses wishing to apply for deferral certificates for future projects. According to the DOR, businesses with current deferral certificates for approved projects will not be affected by the expiration of the High-Tech Deferral and may continue to defer sales and use taxes for eligible purchases made after December 31, 2014, and until the qualifying project is completed (assuming the recipient remains in compliance with the program’s requirements).
Businesses without current deferral certificates must successfully complete the application process and the DOR must issue deferral certificates before December 31, 2014, for new recipients to take advantage of the High-Tech Deferral before it expires. The DOR expects to receive an influx of applications at the end of the year and will only guarantee the review of applications submitted before November 1, 2014. The DOR will process applications submitted after November 1, 2014, in the order in which they are received, but will not guarantee that such applications will be reviewed prior to the deadline. Regardless of how many applications remain in its queue, the DOR will cease issuing deferral certificates on January 1, 2015.[3] Accordingly, high technology businesses with future eligible investment projects should make every effort to submit deferral applications prior to November 1, 2014, to guarantee that they will be reviewed by the DOR.[4]
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Notes:
[1] See RCW § 82.63.010 for descriptions of each of these five fields.
[2] If you are a lessor who qualifies for the High-Tech Deferral or a lessee who wishes to allow your lessor to claim the benefit on your behalf, you must submit the High Technology Application for sales and Use Tax Deferral for Lessor (“Lessor Application”). The lessor or owner of a qualified building is not eligible for a deferral unless (a) the underlying ownership of the buildings, machinery, and equipment vests exclusively in the same person or (b) the lessor by written contract agrees to pass the economic benefit of the deferral to the lessee AND the lessee that receives the economic benefit of the deferral agrees in writing with the DOR to complete the annual survey requirement. See RCW § 82.63.010. In order to substantiate that a lessor meets these requirements, the lessor must submit the Lessor Application.
[3] It is unclear whether the DOR will permit deferral certificate recipients to amend deferral certificates to increase the available sales tax deferral after December 31, 2014; therefore, applicants should take special care to ensure that their applications are as comprehensive as possible.
[4] Although there is no requirement that the recipient begin the eligible investment project within a certain period of time after the DOR has issued the deferral certificate in the statutes or regulations, the DOR has informally indicated that it intends to institute a policy that will require all deferral certificate holders to achieve “meaningful construction” within two years from the date the taxpayer receives its deferral certificate. However, it remains unclear how the DOR will define “meaningful construction” and if or when the policy will be formally adopted and applied. Additionally, because the “meaningful construction” requirement is not included in the statutes or supporting regulations, the retroactive imposition of this restriction after taxpayers have already applied for the deferral raises potential constitutional issues.
