(1)
Introduction. Chapter 82.62 RCW provides business and occupation
(B&O) tax credits to certain persons engaged in manufacturing and research
and development activities. These credits are intended to stimulate the economy
by creating employment opportunities in specific rural counties and community
empowerment zones of this state. The credits are as much as $4,000 per
qualified employment position. This rule explains the eligibility requirements
and application procedures for this program. It is important to note that an
application for the tax credits must be submitted to the department of revenue
(department) within 90 consecutive days after the first qualified employment
position is filled. See subsection (6) of this rule for additional information
regarding this application requirement.
(2)
Who is eligible for these tax
credits? Subject to certain qualifications, an applicant (person
applying for a tax credit under chapter 82.62 RCW) who is engaged in an
eligible business project is entitled to the tax credits provided by chapter
82.62 RCW.
(a)
What is an eligible
business project? An "eligible business project" means:
(i) Manufacturing, commercial testing, or
research and development activities conducted by an applicant;
(ii) In an eligible area at a specific
facility;
(iii) Where employment
increases as described under subsection (3) of this rule; and
(iv) Does not include any portion of a
business project undertaken by a light and power business or any portion of a
business project creating employment positions outside an eligible area.
To be considered an "eligible business project," the
applicant's number of average full-time qualified employment positions at the
specific facility must increase by 15 percent in the four consecutive full
calendar quarters after the calendar quarter during which the first qualified
employment position is filled. Subsection (4) of this rule explains how to
determine whether this threshold is satisfied.
New businesses meeting all requirement of the program, whether
new to Washington or newly formed, are eligible for all qualified employment
positions filled during the four consecutive full calendar quarters immediately
preceding the quarter during which the first qualified employment position is
filled.
(b)
What is an eligible area? An "eligible area" is:
(i) A rural county, which is a county with
fewer than 100 persons per square mile or, a county smaller than 225 square
miles, as determined annually by the office of financial management and
published by the department effective for the period of July 1st through June
30th (see RCW 82.14.370) ; or
(ii) A community empowerment zone (CEZ). CEZ
means an area meeting the requirements of
RCW
43.31C.020 and officially designated by the
director of the department of commerce. For a business located in a CEZ, credit
is only earned for those employees, who at the time of hire, are residents of
the CEZ in which the project is located.
(iii)
How to determine whether an area
is an eligible area. Rural county designation information can be
obtained from the office of financial management internet website at
www.ofm.wa.gov/pop/popden/rural.asp.
The department has instituted a geographic information system (GIS), referred
to as the Tax Rate Lookup Tool, to assist taxpayers in determining taxing
jurisdiction boundaries, local tax rates, and a mapping and address lookup
system to determine whether a specific address is within a CEZ. The system is
available on the department's internet website at dor.wa.gov.
(c)
What are manufacturing
and research and development activities?
(i)
Manufacturing.
"Manufacturing" has the meaning given in
RCW
82.04.120. In addition, for the purposes of
chapter 82.62 RCW, "manufacturing" also includes the activities performed by
research and development laboratories and commercial testing
laboratories.
(ii)
Research
and development. "Research and development" means the development,
refinement, testing, marketing, and commercialization of a product, service, or
process before commercial sales have begun, but only when such activities are
intended to ultimately result in the production of a new, different, or useful
substance or article of tangible personal property for sale. "Commercial sales"
does not include sales of prototypes or sales for market testing if the total
gross receipts from such sales of the product, service, or process do not
exceed $1,000,000.
(3)
What are the hiring
requirements? The average full-time qualified employment positions at
the specific facility will be at least 15 percent greater in the four
consecutive full calendar quarters after the calendar quarter during which the
first qualified employment position is filled than the applicant's average
qualified employment positions at the same facility in the four consecutive
full calendar quarters immediately preceding the calendar quarter during which
the first qualified employment position is filled.
(a)
What is a qualified employment
position? A "qualified employment position" means a position filled by a
permanent full-time employee employed at an eligible business project for four
consecutive full calendar quarters. Once a full-time position is established
and filled it will continue to be considered "filled" even during periods of
vacancy, provided the cumulative period of any vacancies in that position is
not more than 120 days in the four quarter period and the employer is training
or actively recruiting a permanent replacement, full-time employee for the
position.
(b)
What is a
"permanent full-time employee"? A "permanent fulltime employee" is a
position that is filled by an employee who satisfies any one of the following
minimum thresholds:
(i) Works 35 hours per
week for 52 consecutive weeks;
(ii)
Works 455 hours, excluding overtime, each quarter for four consecutive
quarters; or
(iii) Works 1,820
hours, excluding overtime, during a period of 12 consecutive months.
(c)
"Permanent full-time
employee" - Seasonal operations. For applicants that regularly operate
on a seasonal basis only and that employ more than 50 percent of their
employees to work on a seasonal basis, a "permanent full-time employee" is a
permanent fulltime employee as described above or an employee(s) that works the
equivalent amount of hours on a seasonal basis.
(4)
How to determine if the 15 percent
employment increase requirement is met. The credit is only available to
applicants who satisfy the 15 percent employment increase.
(a)
Determining the 15 percent
increase. To determine the projected number of permanent full-time
qualified employment positions necessary to satisfy the 15 percent employment
increase requirement:
(i) Determine the
average number of permanent full-time qualified employment positions that
existed at the facility during the four consecutive full calendar quarters
immediately preceding the calendar quarter for which the first qualified
employment position is filled.
(ii)
Multiply the average number of full-time positions from subsection (i) by .15
or 15 percent. The resulting number equals the number of new positions that
must be filled to meet the 15 percent increase. Numbers are rounded down to the
nearest whole number.
(b)
When does hiring have to occur? All hiring increases must occur
during the four consecutive full calendar quarters after the calendar quarter
during which the first qualified employment position is filled for purposes of
meeting the 15 percent threshold test. Positions hired in the four consecutive
full calendar quarters prior to the first qualified employment position being
filled are not eligible for a credit but the positions are used as a base when
calculating whether the 15 percent threshold has been met.
(c)
The department will assist
applicants to determine their hiring requirements. Accompanying the tax
credit application is a worksheet to assist the applicant in determining if the
15 percent qualified employment threshold is satisfied. Based upon the
information provided in the application, the department will advise applicants
of their minimum number of hiring needs for which credits are being
sought.
(d)
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.
(i) ABC Company anticipates
increasing employment at a manufacturing facility by an average of 15 full-time
qualified employment positions for a total of 113 positions. The average number
of full-time qualified employment positions for the four consecutive full
calendar quarters immediately preceding the calendar quarter for which the
first qualified employment position is filled was 98. To qualify for the tax
credit program, the minimum average number of full-time qualified employment
positions required for the four consecutive full calendar quarters after the
calendar quarter for which the first qualified positions is filled is 98 x .15
= 14.7 (rounding down to 14 positions). Therefore, ABC Company's plan to hire
15 full-time qualified employees satisfies the 15% employment increase
requirement.
(ii) ABC anticipates
increasing employment positions at this same manufacturing facility by an
average of 15 additional full-time qualified employment positions during the
following four consecutive full calendar quarters for a total of 128 positions.
To qualify for the tax credit program, the minimum average number of full-time
qualified employment positions required for these four consecutive full
calendar quarters is 16 (113 x .15 = 16.95, rounding down to 16). Therefore,
ABC Company's plan to hire 15 full-time qualified employees does not satisfy
the 15% employment increase requirement.
(5)
Restriction against displacing
existing jobs within Washington. The law provides that no recipient may
use tax credits approved under this program to decertify a union or to displace
existing jobs in any community of the state. Thus, the average expected
increase of employment positions at the specific facility for which application
is made must reflect a gross increase in the applicant's employment of persons
at all locations in this state. Transfers of personnel from existing positions
outside of an eligible area to new positions at the specific facility within an
eligible area will not be allowed for purposes of approving tax credits. Also,
layoffs or terminations of employment by the recipient at other locations in
Washington but outside an eligible area for the purpose of hiring new positions
within an eligible area will result in the withdrawal of any credits taken or
approved.
(6)
Application
procedures. A taxpayer must file an application with and obtain approval
from the department to receive tax credits under this program. A new
application must be submitted after each group of four consecutive full
calendar quarters that you project employment to increase over 15 percent.
RCW
82.62.020 requires that application for the
tax credits be filed within the first 90 days after the first qualified
employment position is filled. Applications failing to satisfy this statutory
requirement will be disapproved.
(a)
How to obtain and file applications. Rural Area Application for
New Employee B&O Tax Credit forms are provided by the department at the
department's internet website at dor.wa.gov under the option for forms. The
completed application may be sent by fax or mail to the addresses provided in
the application form.
The U.S. Post Office postmark or fax date will be used as the
date of application.
(b)
Confidentiality. Applications, reports, or any other information
received by the department in connection with this tax credit program, except
applications not approved by the department, are not confidential and are
subject to disclosure. All other taxpayer information is subject to the
confidentiality provisions in
RCW
82.32.330.
(c)
Department to act upon application
within 60 days. The department will determine if the applicant qualifies
for tax credits on the basis of the information provided in the application and
will approve or disapprove the application within 60 days. If approved, the
department will issue a credit approval letter containing the dollar amount of
tax credits available for use and the procedures for taking the credit. If
disapproved, the department will notify the applicant in writing of the
specific reasons for disapproval. The applicant may seek administrative review
of the department's disapproval of an application by filing a petition for
review with the department. The petition must be filed within 30 days from the
date of notice of the disallowance pursuant to the provisions of WAC
458-20-100 (Informal
administrative reviews).
(d)
No adjustment of credit after approval. After an application is
approved and tax credits are granted, no upward adjustment of the application
will be made for the four calendar quarters for which the application was
approved.
(7)
How
much is the tax credit? The amount of tax credit is based on the number
of qualified employment positions created and the wages and benefits paid to
these qualified employees.
(a)
How much
tax credit may I claim for each qualified employment position? The
amount of tax credit that may be claimed for each position created is as
follows:
(i) Two thousand dollars for each
qualified employment position that pays $40,000 or less in wages and benefits
annually and is employed in an eligible business project; and
(ii) Four thousand dollars for each qualified
employment position that pays more than $40,000 in wages and benefits annually
and is employed in an eligible business project.
(b)
What qualifies as wages and
benefits? For the purposes of chapter 82.62 RCW, "wages" means
compensation paid to an individual for personal services, whether denominated
as wages, salary, commission, bonus, or otherwise. "Benefits" means
compensation not paid as wages and includes Social Security, retirement, health
care, life insurance, industrial insurance, unemployment compensation,
vacation, holiday, sick leave, military leave, and jury duty. "Benefits" does
not include any amount reported as wages.
(8)
How to claim approved
credits. The recipients must take the tax credits approved under this
program on excise tax returns filed using the department's electronic filing
system. These tax credits may not exceed the B&O tax liability.
(a)
When can credits be used?
The credits cannot be used until the department has approved the application.
After approval, a recipient may use $2,000 or $4,000 of tax credit at the time
it hires each new employee, depending on the wage/benefit level of the position
filled.
(b)
No refunds for
unused credits. No tax refunds will be made for any tax credits which
exceed tax liability during the life of this program. If tax credits derived
from qualified hiring exceed the recipients' business and occupation tax
liability in any one calendar year under this program, they may be carried
forward to the next reporting period(s), until used or expired.
(c)
Expiration of unused
credits. All unused credits earned by the recipient expire on January
1st of the year that is six years after the year in which the latest of any one
of the following events occurs:
(i) The
department receives notice from the recipient or its representative that the
recipient has ceased engaging in business in the state as those terms are
defined in chapter 82.04 RCW;
(ii)
The department closes the recipient's tax reporting account; or
(iii) The filing with the department of the
recipient's last return that claimed the credit.
(9)
Report to be filed by
recipient. A recipient of tax credits under this program must complete
and submit a report of employment activities to substantiate that he or she has
complied with the hiring and retention requirements for approved credits.
RCW
82.62.050. This report must be filed with the
department by the last day of the month immediately following the end of the
four consecutive full calendar quarter period for which a credit is earned.
Based upon this report, the department will verify that the recipient is
entitled to the tax credits approved by the department when the application was
reviewed. Rural Area Annual Report for New Employee B&O Tax Credit forms
are provided by the department at the department's internet website dor.wa.gov
under the option for forms. The completed report may be sent by fax or mail to
the addresses provided in the report form.
The U.S. Post Office postmark or fax date will be used as the
date of filing.
(a)
Verification
of report. The department will use the same report the recipient
provides to the department of employment security, which is known as the
quarterly employment security report, to verify the recipient's eligibility for
tax credits. The recipient must maintain copies of the quarterly employment
report for the four consecutive full calendar quarters prior to the quarter for
which the first qualified employment position is filled, the five calendar
quarters for which the credits are claimed (this includes the quarter for which
the first qualified employment position is filled), and the four consecutive
full calendar quarters following the hiring of persons to fill the qualified
employment positions. (The recipient does not have to forward copies of the
quarterly employment report to the department each quarter.) The department may
use other wage information provided to the department by the department of
employment security. The taxpayer must provide additional information to the
department, as the department finds necessary to calculate and verify wage
eligibility.
(b)
Failure to
file report. The law provides that if any recipient fails to submit a
report or submits an inadequate report, the department may declare the amount
of taxes for which credit has been used to be immediately due and payable. An
inadequate report is one which fails to provide information necessary to
confirm that the requisite number of employment positions has been created and
maintained for four consecutive full calendar quarters.
(10)
What if the required number of
positions is not created? The law provides that if the department finds
that a recipient is not eligible for tax credits for any reason, other than
failure to create the required number of qualified employment positions, the
amount of taxes for which any credit has been used will be immediately due. No
interest or penalty will be assessed in such cases. However, if the department
finds that a recipient has failed to create the specified number of qualified
employment positions, the department will assess interest, but not penalties,
on the taxes against which the credit has been used. This interest on the
assessment is mandatory and will be assessed at the statutory rate under
RCW
82.32.050, retroactively to the date the tax
credit was used. The interest will accrue until the taxes for which the credit
was used are fully repaid.
RCW
82.32.050. The interest rates under
RCW
82.32.050 can be obtained from the
department's website at dor.wa.gov or by calling the department's information
center at 360-705-6705.
(11)
Program thresholds. The department cannot approve any credits that
will cause the total credits approved to exceed $7,500,000 in any fiscal year.
RCW
82.62.030. A "fiscal year" is the 12-month
period of July 1st through June 30th. If all or part of an application for
credit is disallowed due to cap limitations, the disallowed portion will be
carried over for approval the next fiscal year. However, the applicant's
carryover into the next fiscal year is only permitted if the total credits
approved for the next fiscal year does not exceed the cap for that fiscal year
as of the date on which the department has disallowed the
application.