Tax Law Alert: The 2nd Special Session of the 2013 Washington Legislature Adjourned on June 29

by Stoel Rives LLP

The 2nd Special Session of the 2013 Legislature adjourned sine die on June 29, 2013. The accomplishment of this session was passage of a state budget, which had eluded state legislators through the Regular Session that ended April 28th, and the 1st Special Session that ended June 11th.

Notably absent from the final budget compromise were the wholesale repeal of tax exemptions, or any broad-based tax increases to meet budget projections. Proposals to repeal 13 different exemptions and extend temporary rate increases did not survive to passage. Instead, a number of exemptions that were set to expire were extended, and several more exemptions were created or expanded. The most substantial tax legislation to increase revenue was limited to two specific areas in two separate bills that can both be traced to court decisions that were favorable to challenging taxpayers.

The first of these two legislative enactments involves the Washington estate and transfer tax. EHB 2075 was signed by the Governor on June 14, 2013, and was specifically enacted to overturn the Washington Supreme Court decision In re Estate of Bracken, No. 84114-4 (Wash. Oct. 18, 2012) (slip op.) (en banc). That decision held that the Washington estate and transfer tax did not apply to property transferred into a QTIP trust prior to the creation of the Washington estate and transfer tax in 2005. The retroactive nature of this legislation is the subject of litigation, and the law's legitimacy is in doubt.

The second of these two legislative enactments repeals the state and local sales and use tax exemption for residential telecommunication landlines. That portion of 2E2SHB 1971 was expressly drafted in response to a Superior Court decision that extended the sales and use tax exemption to cellular telephone services supplied to nonbusiness telecommunication customers. Similar claims for exemption by providers of prepaid cellular phones and Voice over Internet Protocols were anticipated, and this retroactive legislation may preclude refund claims.

Aside from these two developments, the Legislature largely turned aside efforts to repeal tax exemptions or increase tax rates. Instead, an assortment of exemptions and tax preferences were extended and expanded in the final hours of the session. ESSB 5882, among other things:

Affiliated Entities

  • Provides a statutory B&O tax exemption for "common paymasters" that provides long-needed clarification for advances and reimbursements that were formerly excluded only under WAC 458-20-111, as interpreted by recent court decisions. This exemption is for amounts received by a business (the common paymaster) that acts solely as a "qualified employer of record" to an affiliated company, i.e., under common control. The exemption is limited to specified employee costs such as wages, salaries, and benefits paid to or on behalf of the affiliate's employees. The Department of Revenue is currently conducting internal discussions on implementation of this provision

Renewable Energy

  • Extends the special B&O tax rate of .275% for manufacturers, processors for hire, and wholesalers of certain solar energy systems or materials until June 30, 2017. Also clarifies that "solar grade silicon" is a "semiconductor material" for purposes of the sales and use tax exemption for gases and chemicals used in its manufacture
  • Extends the existing sales and use tax exemption for hog fuel until June 30, 2024, with additional compliance and reporting requirements. An annual survey must be filed with the Department of Revenue for each facility, and the amount of tax exemption claimed in the previous two years becomes due if a facility closes and the closure results in the loss of employment positions previously reported
  • Extends the sales and use tax exemption for machinery and equipment used in facilities that generate electricity from renewable energy to January 1, 2020
  • Extends the sales and use tax exemption for machinery and equipment used in facilities that generate electricity or produce thermal heat from solar energy to June 30, 2018

Agriculture and Food

  • Provides a temporary B&O tax exemption until July 1, 2023 for the sale of dairy products for use of the dairy products as an ingredient or a component in the manufacturing of a dairy product
  • Extends the 2008 tax relief for honey beekeepers until July 1, 2017
  • Provides a sales and use tax exemption to wood products used to impart flavor or support food in the preparation process, such as charcoal, grapevines, or alder planks
  • Exempts mint growers and processors from the sales and use taxes for the purchase of propane or natural gas used to distill mint oil on a farm until 2017

Other Specific Industries

  • Provides a B&O tax exclusion until July 1, 2017 to cooperative finance organizations for amounts derived from loans to rural electric cooperatives or other nonprofit or governmental providers of utility services
  • Creates a retail sales and use tax exemption for the sale of Standard Financial Information to Qualifying International Investment Management Companies
  • Reclassifies dance hall cover charges to no longer be subject to the retail sales tax or the retailing classification of the B&O tax
  • Exempts large private aircraft from state sales and use tax when sold to nonresidents of Washington, including certain labor and services for repair and alteration
  • Expands the exemption from the B&O tax, sales and use taxes, and property taxes for qualifying blood banks and qualifying blood and tissue banks to include testing or processing of blood
  • Exempts a nonprofit organization or library from use tax on a prize in a game of chance valued at $10,000 or less
  • Enacts a sales and use tax exemption for the clay targets purchased for use in clay target shooting for a fee at nonprofit gun clubs

Future Sunsets

  • Requires intent language and expiration dates on all new tax preferences

The remainder of tax legislation for the year could be characterized as narrow and generally focused on technical corrections (although that doesn't minimize their significance to those affected). The exceptions would be the creation of a sales and use tax exemption for disabled veterans for equipment and services to assist in safely operating a motor vehicle (SSB 5072) and the creation of a Class 3 felony for the sale or possession of a "zapper," otherwise known as an automated sales suppression device (SB 5715).

IRS Circular 230 notice: The information contained herein was not intended or written to be used, and cannot be used, by you or any other person (i) in promoting, marketing or recommending any transaction, plan or arrangement or (ii) for the purpose of avoiding penalties that may be imposed under federal tax law.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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