Did Washington's four-year assessment period begin when high-technology project costs were incurred or when deferred tax became due after project certification?

Plain-English summary

The Washington Department of Revenue held that the four-year limitation period for assessing deferred sales and use tax began when project certification made the tax due—not when the taxpayer originally incurred the project costs.

A nonprofit research-and-development organization received a high-technology sales and use tax deferral certificate for tenant improvements and building modifications. The certificate covered 2010 through the stated December 2015 completion date. Although construction was physically complete in 2011, the taxpayer notified the Department in 2016 that the project was operationally complete.

During certification, Audit found that part of the building was rented as excess space and did not qualify for the deferral. Because separate accounting could not identify every nonqualifying item, Audit apportioned project costs and issued assessments in 2018 relating to purchases from 2010 and 2011. The taxpayer argued those years fell outside RCW 82.32.050's four-year period because it had never signed a waiver.

The determination rejected that starting point. The deferral certificate postponed the tax's due date. Tax on the uncertified portion did not become immediately enforceable when the purchases occurred; it became due when the Department partially certified the project in 2016 and required repayment. The four-year clock therefore began in 2016, making the 2018 assessment timely. No special exception or waiver was necessary because the ordinary limitations period had not expired.

The same principle allowed later assessment if the project subsequently failed the program's continuing-use requirements during the statutory recapture schedule. The petition was denied.

What this means for you

High-technology incentive recipients

A deferral is not final forgiveness. Track the operational-completion certification and continuing qualified use because those events control when deferred amounts may become payable.

Research and development organizations

Mixed use can cause partial disqualification. Maintain separate accounting for qualified and nonqualified spaces, assets, and costs to avoid broader allocation methods.

Tax accounting teams

Do not measure the assessment period solely from the purchase invoice date when tax was legally deferred. Identify the event that made the deferred liability due.

Tax professionals

The determination did not create an exception to the four-year statute. It applied the statute's existing “taxes due” language after determining when Chapter 82.63 made the tax payable.

Common questions

Q: Why did 2010–2011 purchases remain assessable in 2018?

A: The certificate deferred their tax. The nonqualifying portion did not become due until partial project certification in 2016.

Q: Did the taxpayer need to sign a limitations waiver?

A: No. The four-year period had not started at the purchase dates, so there was no expired period to extend.

Q: Why was part of the project ineligible?

A: The taxpayer rented excess space, creating use outside the qualifying research-and-development project.

Q: How did Audit calculate the nonqualifying amount?

A: Because the taxpayer's accounting did not separately identify the ineligible items, Audit apportioned the project costs.

Q: Could tax become due even later?

A: Yes. The governing deferral statute included an eight-year schedule under which nonqualifying use could trigger repayment of a percentage of deferred tax.

Citations and references

• RCW 82.32.050(4) (four-year limitation for taxes due)
• RCW 82.63.045(2)(a) (high-technology deferral recapture schedule)
• WAC 458-20-24003(11) (operational-completion and partial certification)
• WAC 458-20-230(2) (assessment limitations)

Source

• Landing page: Washington Tax Decisions ZIP files
• Original PDF: 40WTD174.pdf
• Source archive: Volume 40 ZIP (member WTDvol40/40WTD174.pdf)

Original ruling text

Det. No. 19-0070, 40 WTD 174 (November 30, 2021)

174

Cite as Det. No. 19-0070, 40 WTD 174 (2021)
BEFORE THE ADMINISTRATIVE REVIEW AND HEARINGS DIVISION
DEPARTMENT OF REVENUE
STATE OF WASHINGTON
In the Matter of the Petition for Correction of )
Assessment of
)
)
)
...
)
)

DETERMINATION
No. 19-0070
Registration No. . . .

RULE 230; RCW 82.32.050(4): STATUTORY LIMITATIONS ON
ASSESSMENTS. Chapter 82.63 RCW defers when taxes are due such that the four year statutory time period does not start running until after the deferral period. Headnotes are provided as a convenience for the reader and are not in any way a part of the decision or in any way to be used in construing or interpreting this Determination. Margolis, T.R.O. – A non-profit research and development organization (Taxpayer) protests assessments of use/deferred sales tax on purchases made under its High Technology Sales and Use Tax Certificate on grounds that the assessments are outside the four-year statutory time period. We deny the petition. 1 ISSUE Did the Department’s assessments of use/deferred sales tax on project costs deemed ineligible for deferral violate RCW 82.32.050(4) because the assessments were issued more than four years after the costs were incurred? FINDINGS OF FACT Taxpayer submitted a High Technology Application For Sales and Use Tax Deferral, dated March 24, 2010. The application is for an investment project in Seattle consisting of tenant improvements and modifications to a building leased by Taxpayer for research and development in biotechnology and electronic device technology. In its application, Taxpayer stated that the estimated completion date was December 31, 2015. Taxpayer explains that construction was actually complete as of June 2011, and due to a change in circumstances, Taxpayer rented excess space. On May 19, 2010, the Department of Revenue’s Special Programs Division (SP) approved the application and sent Taxpayer Certificate Number . . . . The certificate allows vendors and contractors to make sales to Taxpayer without charging retail sales tax. The certificate was 1

Identifying details regarding the taxpayer and the assessment have been redacted pursuant to RCW 82.32.410.

Det. No. 19-0070, 40 WTD 174 (November 30, 2021)

175

effective from March 24, 2010, through December 31, 2015. On December 4, 2015, SP sent Taxpayer a letter stating that the estimated project completion date was approaching, asked whether the project will be complete by the due date, and explained that once the project is complete, it will be referred for partial audit. In February, 2016, Taxpayer notified the Department that the project was complete as of December 31, 2015. On April 21, 2016, the Department’s Audit Division (Audit) toured Taxpayer’s facility, and Taxpayer subsequently provided records regarding the project. In 2016, Audit certified that the project was operationally completed but found that a portion of the project was ineligible. Because the building was used partly for purposes that did not qualify under the deferral program, and Audit could not identify non-qualifying items through separate accounting, it determined the applicable tax deferral by apportioning costs. Audit determined that Taxpayer had incurred non-qualifying costs in 2010 and 2011, and on February 16, 2018, assessed Taxpayer $ . . . . The assessment is composed of $ . . . is use/deferred sales tax, $ . . . in interest, and $ . . . in 5% assessment penalty. On February 14, 2018, Audit also issued a deferred assessment against Taxpayer, explaining that if deferral program requirements are met, this assessment will be waived. The deferred assessment is composed of $ . . . in use/deferred sales tax for 2010 and 2011. Taxpayer petitioned for correction of both assessments on grounds that, absent a waiver extending the period of limitations, Taxpayer cannot be held liable for 2010 and 2011 taxes. ANALYSIS RCW 82.63.045 establishes a tax deferral for qualified investment projects, and provides for repayment as follows (in pertinent part): If . . . the department finds that an investment project is used for purposes other than qualified research and development or pilot scale manufacturing at any time during the calendar year in which the investment project is certified by the department as having been operationally completed, or at any time during any of the seven succeeding calendar years, a portion of deferred taxes is immediately due according to the following schedule: Year in which use occurs 1 2 3 4 5 6 7 8

RCW 82.63.045(2)(a).

% of deferred taxes due
100%
87.5%
75%
62.5%
50%
37.5%
25%
12.5%

Det. No. 19-0070, 40 WTD 174 (November 30, 2021)

176

WAC 458-20-24003 (Rule 24003) is the administrative rule regarding tax incentives for high technology businesses. Rule 24003(11) explains the process for certifying that the project is complete as follows: (11) What should a recipient of a tax deferral do when its investment project is operationally complete? (a) When the building . . . is ready for use . . . the recipient must notify the special programs division in writing that the eligible investment project is operationally complete. The department must, after appropriate investigation: Certify that the project is operationally complete; not certify the project; or certify only a portion of the project. The certification will include the year in which the project is operationally complete. . . . (b) If all or any portion of the project is not certified, the recipient must repay all or a proportional part of the deferred taxes. The department will notify the recipient of the amount due, including interest, and the due date. RCW 82.32.050 states as follows: (4) No assessment or correction of an assessment for additional taxes, penalties, or interest due may be made by the department more than four years after the close of the tax year, except (a) against a taxpayer who has not registered as required by this chapter, (b) upon a showing of fraud or of misrepresentation of a material fact by the taxpayer, or (c) where a taxpayer has executed a written waiver of such limitation. The execution of a written waiver shall also extend the period for making a refund or credit as provided in RCW 82.32.060(2). RCW 82.32.050(4) (italics added.) The term “due” is defined as: “Immediately enforceable < payment is due on delivery >.” Black’s Law Dictionary (9th ed. 2009). In this matter, Taxpayer’s payments of use/deferred retail sales tax were not “due” upon purchases at the times of the purchases, as when the tax would normally be due, because the tax deferral program for high-technology businesses had deferred the payments of taxes. See Black’s Law Dictionary (9th ed. 2009) (“Defer” is defined as, “To postpone; to delay
.”); see also RCW 82.63.045(2)(a). Only when a portion of the project was not certified was Taxpayer required to repay part of the deferred taxes. Id.; Rule 24003(11). Because the Department certified the project operationally complete in 2016, and at that time found that part of the project was used for non-qualifying purposes, the four-year nonclaim period in RCW 82.32.050(4) on taxes due for the not certified portion started running in 2016. The 2018 assessment for the not certified portion was well within the four-year period. Similarly, Taxpayer may be timely assessed taxes if it is later determined not to qualify for the deferral, in accord with RCW 82.63.045(2)(a), regardless of whether the costs were incurred outside the four-year period. Taxpayer argues that RCW 82.32.050 and WAC 458-20-230(2), which provide that assessments must be made within four years after the year in which the tax was incurred, contain no exceptions

Det. No. 19-0070, 40 WTD 174 (November 30, 2021)

177

for Chapter 82.63 RCW, and the four-year period is not waived under the program. However, as discussed above, the deferral program does not waive the four-year period, and an exception is unnecessary. It merely defers when the taxes are due such that the time period does not start running until after the deferral period. Taxpayer also asserts that, under WAC 458-20-197 and WAC 485-20-103, taxes are due when the contractor is entitled to progress billings or the services are performed. While these rules provide guidance regarding when tax liability arises and the time and place of sale, we find no conflict between these rules and the deferral program under Chapter 82.63 RCW, under which the assessments at issue do not violate RCW 82.32.050(4). DECISION AND DISPOSITION Taxpayer's petition is denied. Dated this 7th day of March 2019.