Wine Industry Manufacturing Activities

When you take tangible personal property (grapes) and, by applying labor or skill manually or by machinery, turn the grapes into a new and different product (wine) that will be sold, you are conducting a manufacturing activity. The manufacturing activities section of this guide is only intended to address the taxability of those manufacturing activities that may occur in the process of wine making.

This guide also details various B&O tax exemptions and credits, and sales and use tax deferral and exemption programs that are provided for wine industry manufacturers in Washington.

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Contents:

• Who is a "manufacturer?"
• What does it mean "to manufacture?"

Taxability of Manufacturing and Related Activities by Wineries

• B&O tax:
  • Manufacturing  - B&O tax exemption
  • Wholesale sales of wine taken out-of-state – B&O tax exemption
  • Wholesale sales of wine and other products
  • Retail sales of wine and other products
• Common B&O tax exemptions and credits
  • Exemptions
  • Credits
  • Deduction

Other taxes

• Litter tax

Purchases of Goods by Manufacturers

• Purchases subject to sales or use tax

Manufacturing Tax Incentives

Manufacturer’s Sales and Use Tax Exemption for Machinery and Equipment (M&E)

• Who qualifies for the sales/use tax exemption?
• What is covered by the sales/use tax exemption?
• What machinery & equipment qualify for exemption?
• What machinery & equipment doesn’t qualify for exemption?
• What does “used directly” mean?
• What is the “majority use threshold”?

Rural County B&O Tax Credit for New Employees

• Who qualifies for the B&O tax credit?
• What are the reporting/documentation requirements?
• How much is the B&O tax credit? 
• Is there a limit on how much credit I can take?
• How do I take the B&O tax credit?

Rural County Sales and Use Tax Deferral Program

• What are the requirements to qualify for the sales/use tax waiver?
• Who qualifies for the sales and use tax deferral?
• What are the reporting/documentation requirements?
• Special employment requirements – businesses in CEZ
• How and when do I apply for the deferral program?
• What happens if construction begins prior to making the application for the deferral?
• When should I use the Deferral Certificate?
• How does the Department verify that all deferral program requirements are satisfied?   

Wine Industry Manufacturing Activities

Who is a "manufacturer?"

A “manufacturer” is a person who, either directly or by contracting with others for the necessary labor or mechanical services, manufactures for sale or for commercial or industrial use from his or her own materials or ingredients any articles, substances, or commodities. RCW 82.04.110

What does it mean "to manufacture?"

“To manufacture” embraces all commercial or industrial activities where labor or skill is applied, by hand or machinery, to materials so that the result is a new, different, or useful substance or article of tangible personal property that is produced for sale or commercial or industrial use. RCW 82.04.120

Taxability of Manufacturing and Related Activities by Wineries

B&O tax:

Special exemptions are available for wine manufacturers that manufacture wine from fresh fruit and for wine manufacturers that make wholesale sales of wine that are delivered out-of-state.

Manufacturing - B&O tax exemption
As of July 1, 2005, if you manufacture wine from fresh fruit, you qualify for a B&O tax exemption from the manufacturing B&O tax. You are not required to report this activity on your tax return. However, you are required to file the Department’s “Annual Tax Incentive Survey” by March 31, for each year a B&O tax preference is claimed. The survey and excise tax return must be completed electronically. If the survey is not completed the Department can assess applicable taxes. See below under “B&O tax exemptions” for additional information. RCW 82.04.4266(1)(a)

Please note: RCW 82.04.4266, which provides a B&O tax exemption for certain manufacturing and wholesale sales of processed fresh fruit and vegetables, expires July 1, 2012.

• Wine manufacturing activities previously reported
  For the period January 1, 2003, through June 30, 2005, the law provided a preferential B&O tax rate, rather than a B&O tax exemption for manufacturing or certain wholesale sales of processed fresh fruit.
  
  Businesses that manufactured wine during this period and reported under the manufacturing and/or wholesaling B&O tax classifications (from January 1, 2003, through June 30, 2005, qualified for a refund of part of the B&O tax they paid. However, the timeframe for submitting refunds expired March 31, 2008. Eligible businesses were required to file Annual Surveys for 2003 – 2005 by an extended, March 31, 2008, filing date.

Wholesale sales of wine taken out-of-state – B&O tax exemption

If you make wholesale sales of wine or grape juice to persons that transport the wine or juice out of this state in the ordinary course of business, then your sales are exempt from B&O tax under the wholesaling classification. You are not required to report these sales on your tax return. For more information, see the information on Wholesale sales of manufactured wine that are transported out-of- state under “B&O tax exemptions.” RCW 82.04.4266(1)(b)

Please note: RCW 82.04.4266, which provides a B&O tax exemption for certain manufacturing and wholesale sales of processed fresh fruit and vegetables, expires July 1, 2012.

Wholesale sales of wine and other products

All other wholesale sales that do not qualify for either the manufacturing or wholesale sales delivered out-of-state deductions (as discussed above) must be reported on your tax return. Thus, if you make wholesale sales of wine or grape juice to persons who do not transport the wine or juice out of this state in the ordinary course of business your income from such sales is subject to B&O tax under the wholesaling classification. You must receive a Resale Certificate (pdf) (through 12/31/2009) or a reseller permit (effective 01/01/2010) from the buyer to document the wholesale nature of the transaction.

Retail sales of wine and other products

Retail sales of wine and other tangible goods delivered to consumers in Washington are subject to B&O tax under the retailing classification. Such sales are also subject to retail sales tax, which is discussed in detail in the “Sales of Goods and Services” section of this guide.

Common B&O tax exemptions and credits:

Exemptions

• Fresh fruit processing/manufacturing B&O tax exemption: Beginning July 1, 2005, if you manufacture wine in Washington, you likely qualify for the B&O tax exemption provided for persons that process fresh fruit in the state. There is no application for the B&O tax exemption. However, you must file your excise tax returns electronically to qualify for the exemption. Wineries that take advantage of the exemption are required to file an Annual Tax Incentive Survey for each year they claim the tax preference. The Annual Survey must be filed by March 31st of the year following when the exemption was claimed. The B&O tax exemption expires July 1, 2012. RCW 82.04.4266

• Wholesale sales of manufactured wine that are transported out-of-state B&O tax exemption:Also beginning July 1, 2005, if you manufacture wine from grapes (fresh fruit) and sell the wine at wholesale to a buyer that transports the wine out of this state in the ordinary course of business, you qualify for an exemption from the wholesaling B&O tax. You must receive a Resale Certificate (pdf) (through 12/31/2009) or a reseller permit (effective 01/01/2010) from the buyer to document the wholesale nature of the transaction, as well as keep documentation to prove the wine was transported by the purchaser out-of-state.
  
  As with the B&O tax exemption for manufacturers of wine, no application for the B&O tax exemption is necessary. However, you must file your excise tax returns electronically to qualify for the exemption. Wine manufacturers/ wholesalers that qualify for this exemption are required to file an Annual Tax Incentive Survey for each year they claim the tax preference. The Annual Survey must be filed by March 31st of the year following when the exemption was claimed. The B&O tax exemption expires July 1, 2012. RCW 82.04.4266

Credits

• Multiple activities B&O tax credit (MATC): If you manufacture wine in Washington and also report B&O tax under other B&O tax classifications (such as wholesaling or retailing), you may qualify for the multiple activities tax credit (MATC). The MATC is a B&O tax credit that is available to certain manufacturers, extractors, and sellers doing business in Washington. You are eligible for the MATC against the state B&O tax for gross receipts taxes paid in another jurisdiction or for taxes paid on multiple activities within Washington (e.g., manufacturing and wholesaling).
  
  To take the credit, you must complete the Multiple Activities Tax Credit (Schedule C) (pdf) and attach it to your excise tax return each time you claim the credit. The form is available at http://dor.wa.gov under “Get a form or publication.”
  
  To the extent that your winery is exempt from the manufacturing B&O tax under RCW 82.04.4266 (1)(a), you are not required to complete a MATC form.

• Rural county B&O tax credit for new employees in manufacturing and research & development: See under “Manufacturing Tax Incentives.”

Deduction

• Interstate/foreign sales B&O tax deduction: As noted above, wholesale sales by a manufacturer of wine made with fresh fruit/grapes to a buyer that transports the wine out of this state in the ordinary course of business are exempt from B&O tax and are not reported on the tax return. See above for further details.
  
  However, amounts from wholesale or retail sales of wine delivered to the buyer outside of Washington may be deducted from the taxable amount reported for B&O tax as nontaxable interstate/foreign sales. The seller must maintain proper documentation to prove the product was delivered out-of-state. (See WAC 458-20-193(3) for documentation requirements.) The sales amounts must be included in the gross sales figure reported on the tax return, and then may be deducted from the wholesaling or retailing B&O tax classification under the “Interstate & Foreign Sales” (0304 and 0204) deduction classifications.

Other taxes

Litter tax

Generally, litter tax is due when you manufacture, or make wholesale and/or retail sales, of wine. (See chapter 82.19 RCW and WAC 458-20-243.) However, if the wine is transported to the purchaser outside of Washington litter tax does not apply to the sale.

Litter tax is assessed at a rate of .015 percent and is based on the selling price or, if no charge is made (such as wine used in a tasting room or donated to a charity) on the comparable retail selling price. The tax is reported on each Department of Revenue tax return.

Purchases of Goods by Manufacturers

Purchases subject to sales or use tax

Generally, tangible personal property sold to, purchased or rented by manufacturers is subject to retail sales tax, unless specifically exempt by law. Taxable examples include:

• Office equipment and supplies (i.e., desks, office computers, envelopes)
• Hand tools (i.e., hammers, wrenches, rakes, drills)
• Disposable products or products that last less than one year (i.e., disposable liners or filters)
• Items not used directly in the manufacturing process (i.e., boots, garbage cans, cleaning equipment)

Also, certain retail services sold to or purchased by manufacturers are subject to retail sales tax or use tax, unless specifically exempt by law. Taxable examples include:

• Construction of buildings
• Installation of non exempt fixtures, machinery, or equipment
• Repair of non-exempt buildings, machinery, or equipment

If you are not charged sales tax at the time of sale, you must pay use tax directly to the Department on the purchase price of taxable items, including any shipping or delivery costs. You may report and pay use tax on your Department of Revenue tax return.

The law provides Washington manufacturers with specific sales/use tax exemption and deferral programs. These programs are discussed under the “Manufacturing Tax Incentives” section, and include:

• Sales/use tax exemption for machinery and equipment used directly in the manufacturing process, installation and repair parts and services for qualifying machinery and equipment;
• Sales/use tax deferral on qualified construction and equipment costs for wine manufacturers located in rural counties, Community Empowerment Zones (CEZs) and counties containing CEZs.

Manufacturing Tax Incentives

Manufacturer’s Sales and Use Tax Exemption for Machinery and Equipment (M&E)

This sales and use tax exemption applies to purchases or use of qualifying machinery and equipment (M&E) by a manufacturer (winery) where the M&E is used directly in the manufacturing /wine making operation. RCW 82.08.02565, RCW 82.12.02565, and WAC 458-20-13601

Who qualifies for the sales/use tax exemption?

• Manufacturers that manufacture wine for sale or processors for hire that manufacture wine that will be sold by their customer.

• Note: RCW 82.04.130 excludes "the growing, harvesting, or producing of agricultural products; or packing of agricultural products" from the definition of manufacturing. This precise exclusion from the definition of "manufacturing," plus the fact that the M&E exemption is limited to manufacturing, means that growers/vintners are not eligible for the M&E exemption for growing and harvesting activities. However, if you both grow grapes and manufacture them into wine, M&E used in your manufacturing activities at the manufacturing site qualify for exemption.

What is covered by the sales/use tax exemption?

• Machinery and equipment that is used directly by a manufacturer or processor for hire in a manufacturing, processing for hire, or research and development operation.
• Charges for parts, labor, and services used in installing, repairing, cleaning, altering, or improving qualifying M&E.

What machinery & equipment qualify for exemption?

• Industrial fixtures: an item attached to the building or to land that becomes part of the real estate and is classified as real property, not tangible personal property. Examples: craneways, certain concrete slabs, tanks
• Devices: an item that is not attached to a building or site. Examples: forklifts, pallet jacks, destemmers, crushers, presses, sorting machines, free standing shelving, ladders, wine barrels
• Support facilities: a part of a building or structure or improvement used to contain or steady an industrial fixture or device. A support facility must be specially designed and necessary for the industrial fixture or device and must perform a function beyond just being a building, structure, or improvement. Examples: special concrete pads needed for a device
• Pollution control equipment: equipment installed and used in a qualifying manufacturing operation to prevent air or water pollution or contamination for the operation.

What machinery & equipment doesn’t qualify for exemption?

• Hand powered tools
  • Example: screw drivers, hammers, clamps, tape measures
• Items (including repair and replacement parts) with a useful life of less than one year
  • Example: disposable liners or filters
• Buildings and parts of buildings that merely provide workspace for people, or provide shelter or store tangible personal property or machinery and equipment.
  • Examples: Office space, closets, washrooms, tasting rooms
• Building fixtures that aren’t integral to the manufacturing operation and are permanently affixed to and become a physical part of a building.
  • Examples: fire sprinklers, building electrical systems, washroom fixtures, shelving in tasting room
• Items that aren’t “used directly” in the manufacturing process. (See below.)
• Items that don’t meet the “majority use” criteria. (See below.)

What does “used directly” mean?

Only M&E that meets the “used directly” criteria qualifies for the sales/use tax exemption. Qualifying M&E may meet any of the following criteria:

• Acts upon or interacts with the grapes or wine being manufactured.
  • Examples: destemmer, top fermenter, crusher wine barrels

• Conveys, transports, handles, or temporarily stores the grapes or wine being manufactured.
  • Examples: wheelbarrows, handcarts, storage racks, forklifts, tanks, vats, piping, wine barrels, and concrete storage pads
  • Not qualifying under this criterion: Floor space in buildings; items used to package, ship, or support or brace the wine during transport

• Controls, guides, measures, verifies, aligns, regulates, or tests wine at or away from the manufacturing site.
  • Examples: graduated cylinders, chemical testing equipment

• Provides physical support for or access to the wine.
  • Examples: catwalks in between vats; scaffolding around tanks; braces under vats; ladders near controls
  • Not qualifying under these criteria: M&E used to access the building, provide work space for people or space for items, such as doors or stairways

• Produces power for or lubricates the machinery and equipment.
  • Examples: a generator that provides power to destemmer; lubricating devices such as hoses, oil guns, and pumps, whether or not attached to the machinery and equipment

• Produces another item of tangible personal property for use in the manufacturing operation.
  • Examples: printer that makes bottle labels, embossing press for labels, caps

• Places the wine in the bottle, container, or package, in which it is normally sold or transported.
  • Example: bottling equipment

• Is integral to research and development as defined in RCW 82.63.010.

What is the “majority use threshold”?

• When you use machinery and equipment directly in a qualifying manufacturing activity and also in nonqualifying activities, the M&E is eligible for exemption only if the qualifying use meets the majority use requirement, as detailed in WAC 458-20-13601.
• Typically, the majority use threshold is determined on a case-by-case basis, looking at the machinery and equipment’s use during a calendar year using any of the following:

• Time
• Value
• Volume
• Other comparable comparison measurements
  
  
• Examples: A forklift that is used at the manufacturing site to lift barrels of wine 75% of the year and is used in the non-qualifying farming operation to lift crates of grapes onto trucks the remaining 25% of the time meets the majority use threshold. A pick-up truck does not meet the threshold if it is used at the manufacturing site to move grape bins around the manufacturing site for 2 weeks of the year and used for general transportation off the manufacturing site the remaining 50 weeks.
• See WAC 458-20-13601 for a more in-depth discussion of the exemption and qualifying criteria.

Rural County B&O Tax Credit for New Employees

This incentive program provides B&O tax credits for qualifying employers (including wine manufacturers), located in rural counties or community empowerment zones (CEZs) for each new manufacturing employment position they create. Chapter 82.62 RCW, WAC 458-20-240

Who qualifies for the B&O tax credit?

• Manufacturers and R&D businesses that locate or expand their operations in rural counties (those with a population density of less than 100 people per square mile or that are smaller than 225 square miles) or CEZs.
  • The Office of Financial Management determines yearly which counties qualify as rural and publishes the list of rural counties. Currently, rural counties include all but: King, Kitsap, Pierce, Clark, Snohomish, Spokane, and Thurston counties.
  • CEZs are located in: Bremerton, Duwamish, Spokane, Tacoma, White Center, and Yakima.

What are the reporting/documentation requirements?

• Effective January 1, 2008, the number of average full-time qualified employment positions (including seasonal or temporarily vacant positions) must be at least 15% greater in the four consecutive calendar quarters during which the credit is sought than the number of positions at the same facility in the immediately preceding four consecutive calendar quarters.
• You must submit the Rural Area Application for B&O Tax Credit on New Employees (pdf) to the Department of Revenue within 90 days of hiring a qualified employee.
• You must submit an annual report (New Employee B&O Tax Credit Annual Report) and worksheet to the Department. The report is due by the last day of the month immediately following the end of the four consecutive calendar quarter period for which the credit is earned. For example, if the four consecutive calendar quarters you use are April – June 2007(quarter 2) through January – March 2008 (quarter 1), your annual report and worksheet are due by the end of April 2008 (the month immediately following the end of the four quarter period.)

How much is the B&O tax credit?

• $2,000 for each qualified employment position with annual wages/benefits less than or equal to $40,000; or
• $4,000 for each qualified employment position with annual wages/benefits greater than $40,000.

Is there a limit on how much credit I can take?

• No, not on individual employers. However, the state-wide cap for all credits under this program is $7.5 million per fiscal year (July 1 through June 30). Any credits disallowed because the state-wide credit has been met can be carried over and taken in the next fiscal year.

How do I take the B&O tax credit?

• Once your program application is approved, the Department will send you an Employee Credit Certificate. You may take a credit against your B&O tax liability on credit section of your excise tax return and attach a copy of the credit notice to your excise tax return. The credit cannot exceed the B&O tax owed on the tax return.

For more details on the B&O tax credit, see chapter 82.62 RCW, WAC 458-20-240, and our Tax Incentive Programs page.

Rural County Sales and Use Tax Deferral Program

This incentive program grants a deferral of sales and use taxes for manufacturers and others locating in rural counties, community empowerment zones (CEZs), or counties that contain a CEZ. The sales and/or use taxes on qualified construction and equipment costs for such businesses located in these specific areas are waived when all the program requirements are met and verified. Chapter 82.60 RCW and WAC 458-20-24001

What are the requirements to qualify for the sales/use tax waiver?

• You must file an annual report by March 31 of the year following the year the project is certified as operationally complete and for the next seven years. (See below for additional information.)
• All purchases must be verified by the Department as eligible. (See below for additional information.)
• The facility must be used for qualified manufacturing activities during the year that the project was certified as operationally complete and the following seven years.
• If the business is in a CEZ or county with a CEZ, certain employment requirements must be met. (See below for additional information.)

Who qualifies for the sales and use tax deferral?

• Manufacturers and other selected businesses that locate or expand their operations in rural counties (those with a population density of less than 100 people per square mile or that are smaller than 225 square miles) or counties that contain CEZs. Currently, the only ineligible counties are: Clark, Snohomish, and Thurston.
  • The Office of Financial Management determines yearly which counties qualify as rural and publishes the list of rural counties.
  • CEZs are located in: Bremerton, Duwamish, Spokane, Tacoma, White Center, and Yakima.

What are the reporting/documentation requirements?

• Manufacturers must invest in facility construction or expansion or acquire machinery and equipment; however, a new building is not required. Used machinery qualifies, so long as it is new to the business or the state and is integral and necessary to the business operations.
• The cost of expanding or modernizing an existing facility must increase floor space or production capacity.
• All investment project costs, including labor and services for planning, installation and construction, are used to determine what is eligible for deferral. If the facility is used partly for manufacturing and partly for some other purpose (such as a tasting room), the tax deferral is determined by apportioning the construction costs.

• You must complete and submit an Annual Tax Incentive Survey (Annual Survey for Tax Incentive Programs, Preferential Rates/Credits/Exemptions/Deferrals) to the Department.
  • The Annual Survey must be received by March 31 of the year following the calendar year in which the project is certified as operationally complete by the Department and for the seven succeeding calendar years.
  • If you do not complete the survey by the due date, 12.5 percent of the deferral tax is immediately due.
  • See WAC 458-20-268 for specific details on obtaining and completing the Annual Tax Incentive Survey.

Special employment requirements – businesses in CEZ

• Special employment requirements apply to manufacturers that locate in a county with a CEZ (King, Kitsap, Pierce, Spokane, and Yakima.)

• At least one qualified employment position must be created for every $750,000 of investment upon which a deferral is requested.
  • “Qualified employment position” is a permanent, full-time employee employed by a qualifying business during a 12 consecutive month period.
• A new, qualified employment position must be filled by a person who, at hiring time, is a resident of the CEZ within the county where the project is located.
  • Note: the deferral application must be made before hiring the CEZ employee.
• By the end of the 2nd calendar year following the year when the project was certified operationally complete, the required employment position employees must have been hired and retained for 12 consecutive months or all deferred taxes are immediately due.

How and when do I apply for the deferral program?

• You must file the Rural County Application for Sales and Use Tax Deferral (pdf) with the Department before you break ground on construction, take possession of machinery or equipment, or fill qualifying employment positions.
  • Once you’ve filed an application, construction, possession of machinery or equipment, and/or hiring for qualifying positions can begin. The Department will rule on applications within 60 days.
• If your application is approved, you will receive a Sales and Use Tax Deferral Certificate that you will provide to vendors and contractors at the time you purchase qualifying materials or services.

What happens if construction begins prior to making the application for the deferral?

• 1. Sales tax exemption for construction of the facility is lost.
• 2. Purchases of eligible manufacturer’s machinery and equipment may still be exempt from sales tax.

When should I use the Deferral Certificate?

• You should give the Deferral Certificate to vendors and contractors to receive a sales tax exemption on:
  • Qualified buildings used in manufacturing or research and development activities. The building must be essential to or an integral part of the manufacturing activity.
  • Qualified machinery and equipment
  • Labor and services purchased to plan, install and construct the project

• Note: Buildings used for other purposes than manufacturing, such as tasting rooms, banquet facilities, garages, etc.) do not qualify for this deferral.

How does the Department verify that all deferral program requirements are satisfied?

• Once the project is completed, a Department of Revenue auditor will verify that:

• you are performing qualified manufacturing activities at your facility;
• the approved percentage of your structure is eligible for deferral; and
• 100 percent of the machinery and equipment is eligible for deferral.

• You will need to provide the following records for the audit period to the auditor:

• Purchase invoices (i.e., accounts payable, receipts)
• Supporting documentation for construction (i.e., construction contracts)
• Original Sales and Use Tax Deferral Certificate

For additional information and details on the Rural County Sales and Use Tax Deferral, see Chapter 82.60 RCW, WAC 458-20-24001, and our Tax Incentive Programs page.