Chapter Three


High Technology Sales/Use Tax Exemption


Applications must be filed with the Department of Revenue before construction begins or machinery or equipment is acquired. The investment project must be devoted to research and development or pilot scale manufacturing in order to qualify for the deferral/exemption. The investment must consist of machinery and equipment, new structures (including materials and labor), and/or expansion or renovation to increase floor space or production capacity. The machinery and equipment may be used but must be new to the state or to the business.

Qualified machinery and equipment means fixtures, equipment and support facilities that are an integral and a necessary part of pilot scale manufacturing or qualified research and development operation. Included are computers, software, data processing equipment, laboratory equipment, instrumentation, and other devices used in the process of experimentation to develop a new or improved pilot model, plant process, product, formula, invention or similar property.

If a building, machinery, or equipment is used partly for pilot scale manufacturing or qualified research and partly for other purposes, the tax deferral will be apportioned on the basis of the cost of the area used for the qualified purposes.


No repayment of the taxes deferred under this program is required if the business uses the investment project for qualified research and development or pilot scale manufacturing. If the investment project is used for any other reason at any time during the calendar year in which the investment is certified as operationally complete, or during the next seven calendar years, the deferred taxes must be repaid immediately according to a prorated schedule. Interest will be assessed on the payments.

The sales or use taxes on machinery or equipment used in pilot scale manufacturing that could have qualified for the sales/use tax exemption for manufacturers at the time of sale or first use do not have to be repaid.


A project that has received any sales/use tax deferral under this or any other deferral program is not eligible for further deferral under this program. A research and development facility may get additional deferral certificates to upgrade to pilot scale manufacturing. Businesses may have more than one project that may qualify for deferral/exemptions under any of these programs.

Applications may be requested by calling the Department of Revenue’s Telephone Information Center at 1-800-647-7706 (TTY 1-800-451-7985).

The Department of Revenue must approve or deny applications within 60 days. If denied, the business may appeal the decision to the Department’s Division of Appeals. Businesses approved for a deferral program receive a Tax Deferral Certificate from the Department to present to their contractors and vendors. This certificate allows the contractors and vendors to sell to approved businesses without charging retail sales tax (the seller must keep a copy of the certificate in its records).

High Technology Business and Occupation Tax Credit


Expenditures by qualified firms for research and development purposes are eligible for a credit against B&O tax liability incurred during the same year. Such expenditures must exceed 0.92 percent (0.0092) of the firm’s taxable amount during that same year. Spending for research and development includes operating expenses, wages and benefits, supplies, and computer expenses directly incurred while conducting the research and development. For example: a business reports a taxable amount of $1 million on its Combined Excise Tax Return during a calendar year. This company must spend at least $9,200 ($1,000,000 x .0092 = $9,200) on qualified research and development during that same calendar year to claim the credit.

Businesses may estimate their annual spending on research and development for the year and thus take the credit throughout the year. If a firm’s spending does not reach the threshold, it is required to pay the underpaid taxes, with interest, to the Department of Revenue.

The rate by which the amount of credit is determined will be tied to B&O tax rates beginning on July 1, 1998. Nonprofit corporations and associations will calculate the credit by applying the B&O rate for R&D income, per RCW 82.04.260(6); this rate will be 0.484 percent. All other firms will utilize a rate equivalent to the B&O tax rate for general services, per RCW 82.04.290(2); this rate will drop to 1.5 percent on July 1, 1998. The current rates are 0.515 percent and 2.5 percent respectively. A person performing research under contract has the option of using the greater of either its qualified research and development expenditures or 80 percent of the amounts received as compensation for conducting the qualified research and development. The following examples would apply using current rates for the credit.

Example A: a for-profit business performs its own research and development and has research and development expenses of $10,000. To determine if the amount of expenses qualifies the business for a credit, the taxable income must be determined. To do this:

Divide $10,000 by .92 percent ($10,000 / .0092 = $1,086,957). If the taxable amount is $1,086,957 or less, the expenses qualify.

To determine the amount of credit:

Multiply the expenses ($10,000) times the rate (2.5%). The amount of credit is determined to be $250. ($10,000 x 0.025% = $250).

To use the credit:

If the business is a manufacturer, the B&O tax on the taxable amount is $5,261

($1,086,957 x .00484 = $5,261). The credit of $250 should be subtracted from

$5,261, leaving a B&O tax due of $5,011.


Example B: a for-profit business performs its own research and development. It has a gross taxable income of $2,000,000. To determine if the business is eligible for the credit:

It must have expenses that total $18,400 ($2,000,000 x .0092 = $18,400). If the expenses are $18,400 or more, the credit may be used.

To calculate the amount of credit:

Multiply the expenses ($18,400) times the rate (2.5%). The amount of credit is $460 ($18,400 x 0.0250 = $460).

To use the credit:

The manufacturing B&O tax on $2,000,000 is $9,680 ($2,000,000 x .00484 = $9,680). The credit of $460 should be subtracted from $9,680, leaving B&O tax due of $9,220.

Example C: a nonprofit business performs its own research and development. It has a gross taxable amount of $1,000,000 and $8,000 in expenses. To be eligible for the credit, this business must have $9,200 of expenses ($1,000,000 x .0092 = $9,200). In this example the firm would not qualify, and no credit can be used.

A person performing qualified research and development under contract for another MAY ASSIGN all or a portion of the credit to the person paying for the research and development. Both businesses must meet the eligibility requirements. Assigned credits may not exceed the smaller of the business and occupation tax of the research business or $2 million.

When credit is used, a copy of the "Affidavit - Research and Development Credit" must be attached to the Combined Excise Tax Return. The credit should be entered on page one of the Combined Excise Tax Return, under the TOTALS section. The amount of the credit should also be entered on page two of the Combined Excise Tax Return under the CREDITS section, credit ID number 810.


No preapproval from the Department of Revenue is required to use this credit. The first time a business uses the high tech B&O tax credit, it must complete an initial survey and mail it to the address shown on the bottom of the form. In addition, the business must complete the "Affidavit - Research and Development Credit" and attach it to the Combined Excise Tax Return each time the credit is used.

The forms may be requested by calling the Department of Revenue’s Telephone Information Center at 1-800-647-7706 (TTY 1-800-451-7985).

Data Limitations

In general data were available for most of the participants in each of the programs. Participants in the sales/use tax exemption program are required to file an application to be included in the program. Most applications were completed in full; however, some of the applications were missing at least some information. The most frequent information that is missing from applications is the amount of anticipated employment. Both current employment and expected future employment are missing from approximately 30 percent of applications processed to date. Project cost information is the second most frequent information missing from applications. Approximately 20 percent of applications are missing project cost data.

A frequent problem with the B&O credit program was that the affidavit was improperly filled out or information was omitted. There is apparently some confusion by taxpayers in the ability to take credit during a calendar year when individual months of activity limit the credit to the amount of B&O tax for the period but other periods in the year would have allowed the credit. Some firms apparently did not accumulate these unused credits that they might have used in subsequent months within the year. Additionally, several firms attempted to apply the credit to other types of taxes and others attempted to carry the credit forward to subsequent years.

Each time the credit is taken on the Combined Excise Tax Return, state law requires that an affidavit be filed with the return. A copy of the B&O credit affidavit is included in the Appendix. Almost all credits were accompanied by an affidavit, but many were incomplete.

The major difficulty in analysis of these types of programs is that the specific information which is helpful or even necessary to do the analysis is not provided by the firm or is not readily available from other sources.

One area of difficulty with the B&O credit program as opposed to the sales tax deferral/ exemption program is that the location of the research activity is not known or provided. Since an application form is not provided, only the mailing address of the taxpayer is known, and this must be assumed to be the location of the investment activity. For firms with single locations this is not a problem, but larger firms with multiple locations are not always separately identified for employment tax purposes.

Another potential problem is the lack of product information which would help in determining if product line diversification is improving. We will need to actually survey the firms to obtain this type of information. Because of the limited time since the program inception, plus the lag time between R&D investment and product development, the Department has not yet surveyed the participating firms. However, it is anticipated that such a survey will be incorporated in subsequent studies.

The lack of copyright statistics also is a hindrance to analyzing the trend in software research and development activity.