Can an aerospace company claim Washington's product-development B&O credit using estimated federal R&D expenditures instead of project-level actual records?

Plain-English summary

The Washington Department of Revenue denied an aerospace company's B&O-tax credit because the company could not document actual qualified aerospace product-development expenditures in its ordinary business records.

The company claimed a refund equal to 1.5% of asserted expenditures from 2015 through October 2020. It supported the claim with a commissioned federal R&D study that estimated labor and supply costs under Internal Revenue Code sections 41 and 174. But the company did not track expenditures by specific project or distinguish aerospace R&D from manufacturing and non-aerospace development in its books.

RCW 82.04.4461 defines a Washington-specific credit for qualified aerospace product-development expenditures. RCW 82.32.070 and WAC 458-20-254 require source records sufficient to verify the claim. The determination rejected both the federal-study estimates and the company's proposal to use aerospace gross income as an expense proxy because neither showed which actual expenditures met Washington's definition. The refund petition was denied.

What this means for you

Aerospace manufacturers and developers

Track qualifying costs while the work occurs. Project codes, payroll records, invoices, and cost ledgers should connect actual expenditures to qualifying aerospace research, design, engineering, prototype, testing, or certification activities.

R&D tax-credit teams

A federal research-credit study is not automatically proof for a state credit with a different statutory definition. Map every methodology and cost category to Washington's requirements before filing.

Accountants and refund reviewers

Revenue ratios and after-the-fact estimates cannot replace source documentation when the statute grants a credit based on expenditures. Mixed aerospace and non-aerospace operations make segregation especially important.

Common questions

Q: Why did the federal R&D study fail?

A: It estimated expenditures under federal sections 41 and 174 and did not document actual costs qualifying under Washington's aerospace-credit definition.

Q: Could aerospace revenue serve as a proxy for aerospace R&D expenses?

A: No. Gross income did not show which actual expenditures were for qualified aerospace product development.

Q: Did the company perform qualifying aerospace work?

A: The company performed aerospace development, but it also conducted manufacturing and non-aerospace work. Without project-level records, the Department could not verify the amount of qualified expenditure.

Q: What records should support the credit?

A: Ordinary source records such as project accounting, payroll allocations, purchase invoices, contracts, ledgers, and work papers that connect actual costs to qualifying activities.

Citations and references

• RCW 82.04.4461(1), (2), and (5) (credit amount and qualifying activities/expenditures)
• RCW 82.32.070(1) and WAC 458-20-254(3) (source-record requirements)
• Simpson Investment Co. v. Department of Revenue, 141 Wn.2d 139, 3 P.3d 741 (2000)
• Budget Rent-A-Car of Washington-Oregon, Inc. v. Department of Revenue, 81 Wn.2d 171, 500 P.2d 764 (1972)

Source

• Landing page: Washington Tax Decisions ZIP files
• Original PDF: 45WTD054.pdf
• Source archive: Volume 45 ZIP (member wtdvol45/45WTD054.pdf)

Original ruling text

Det. No. 23-0102, 45 WTD 054 (May 5, 2026)

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Cite as Det. No. 23-0102, 45 WTD 054 (2026)
BEFORE THE ADMINISTRATIVE REVIEW AND HEARINGS DIVISION
DEPARTMENT OF REVENUE
STATE OF WASHINGTON
In the Matter of the Petition for Refund of )
Assessment of
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...
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DETERMINATION
No. 23-0102
Registration No. . . .

[1]
RCW 82.04.4461(5)(d): B&O TAX CREDIT FOR QUALIFIED
AEROSPACE DEVELOPMENT EXPENDITURES – A B&O tax credit is
allowed for “qualified aerospace product development expenditures.” The term “qualified aerospace product development expenditures” includes only actual expenditures documented in the ordinary course of business, and not estimates of expenditures calculated under Internal Revenue Code Sections 41 and 174.
[2]
RULE 254; RCW 82.32.070: BUSINESS AND OCCUPATION TAX
CREDIT - RECORDS – To claim a credit against B&O tax for qualified aerospace product development expenditures, a taxpayer must provide documentation of actual qualified expenditures. 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. 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. NATURE OF THE CASE Gabriella Herkert, T.R.O. – An aerospace manufacturing and research and development (R&D) business protests denial of its request for refund based on a tax credit available for qualified aerospace product development expenditures. We deny taxpayer’s petition. 1 ISSUE Under RCW 82.04.4461, RCW 82.32.070 and WAC 458-20-254 (Rule 254), did taxpayer sufficiently document its research and development expenditures to qualify for an aerospace product development expenditures tax credit against its business and occupation (B&O) tax?

1

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

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FINDINGS OF FACT
. . . (Taxpayer) develops and manufactures aircraft structural materials Taxpayer engages in research and development of aerospace products and materials. Taxpayer also engages in nonaerospace manufacturing and development. In [City 1], Washington, Taxpayer designs, manufactures and sells . . . components for the aerospace industry. In [City 2] Washington, Taxpayer manufactures . . . components . . . for the aerospace industry. Taxpayer also engages in non-aerospace activities. On December 28, 2020, Taxpayer filed a request for refund. Taxpayer requested a refund equal to 1.5% of its expenditures from January 1, 2015, through October 31, 2020, 2 that Taxpayer asserts were qualified aerospace product development costs. Taxpayer supported its request with a federal income tax survey it commissioned. 3 Taxpayer admits it does not track expenditures to particular business activities. Taxpayer did not provide documentation maintained in the ordinary course of its business tracking expenditures to specific projects – manufacturing or R&D. Taxpayer concedes it engages in R&D not related to aerospace, although Taxpayer contends it does so to a much lesser extent. The Department of Revenue’s (Department) Audit Division (Audit) reviewed Taxpayer’s books and records for the tax period May 1, 2016, through October 31, 2020. On May 20, 2022, the Department issued . . . Results of Your Recent Audit, showing a tax adjustment of $. . . . 4 . . . The Department denied Taxpayer’s refund request with respect to its claimed qualified aerospace product development expenditures tax credit in the amount of $. . . . The Department’s denial of Taxpayer’s refund request read in part: You are not eligible for the requested aerospace product development credit due to lack of substantiating documentation. Taxpayer timely requested review. Taxpayer contends that the amount of gross income from aerospace activities should be used as a proxy for the amount of expenses incurred in aerospace product development. Taxpayer contends that the amount of gross income from its aerospace activities can be verified using its excise tax returns.

...
The federal R&D study was commissioned by Taxpayer from its accounting firm . . . . A procedural manual provided for 2013-2020 included an explanation of how qualifying labor and supplies were calculated in the studies. Such expenditures were not actual, but calculated based on federal R&D methodology. Each procedural manual contained a section called ‘Activity Documentation.’ For the 2017-2019 period, the section stated, “this documentation is intended to demonstrate how the activities performed meet the legal requirements of IRC Sections 41 and 174.” No reference is made to whether the activities qualify under Washington’s aerospace R&D credit, which is different from the requirements of IRC Sections 41 and 174. 4 Taxpayer’s refund request was allowed for . . . sales shipped to Washington from out-of-state plants. Taxpayer’s refund request was allowed for a personal property tax credit equal to personal property taxes paid on exempt machinery and equipment (M&E) used in the manufacturing operation multiplied by a fraction for qualifying use. Those portions of Taxpayer’s original refund request are not in dispute. 2 3

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ANALYSIS
Washington imposes a B&O tax “for the act or privilege of engaging in business” in Washington. RCW 82.04.220. The B&O tax measure and rate are determined by the type or nature of the business activity in which a person is engaged. Chapter 82.04 RCW. The specific tax rate is determined by the nature of the business activity in which a taxpayer is engaged. See generally chapter 82.04 RCW. The Legislature “intended to impose the business and occupation tax upon virtually all business activities carried on within the state.” Simpson Inv. Co. v. Dep’t of Revenue, 141 Wn.2d 139, 149, 3 P.3d 741 (2000) (quoting Time Oil Co. v. State, 79 Wn.2d 143, 146, 483 P.2d 628 (1971)). The B&O tax is not a tax on profit, net gain, capital gain, or sales “but a tax on the total money or money’s worth received in the course of doing business.” Budget Rent-A-Car of Wash.-Oregon, Inc. v. Dep’t of Revenue, 81 Wn.2d 171, 172, 500 P.2d 764 (1972). The B&O tax provisions “leave practically no business and commerce free of the business and occupation tax.” Id. at 175.
...
RCW 82.04.4461 provides a B&O tax credit for qualified preproduction development expenditures for aerospace product development activities, as follows: (1)(a)(i) In computing the tax imposed under this chapter, a credit is allowed for each person for qualified aerospace product development. For a person who is a manufacturer or processor for hire of commercial airplanes or components of such airplanes, credit may be earned for expenditures occurring after December 1, 2003. For all other persons, credit may be earned only for expenditures occurring after June 30, 2008. (2) The credit is equal to the amount of qualified aerospace product development expenditures of a person, multiplied by the rate of 1.5 percent. (4) Any person claiming the credit must file a form prescribed by the department that must include the amount of the credit claimed, an estimate of the anticipated aerospace product development expenditures during the calendar year for which the credit is claimed, an estimate of the taxable amount during the calendar year for which the credit is claimed, and such additional information as the department may prescribe. RCW 82.04.4461(5)(b) defines “aerospace product development” as:
[R]esearch, design, and engineering activities performed in relation to the development of an aerospace product or of a product line, model, or model derivative of an aerospace product, including prototype development, testing, and certification.

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RCW 82.32.070 requires taxpayers to maintain records adequate for the Department to determine their tax liability. RCW 82.32.070(1) states, in relevant part: Every taxpayer liable for any tax collected by the department must keep and preserve, for a period of five years, suitable records as may be necessary to determine the amount of any tax for which the taxpayer may be liable. Such records must include copies of all of the taxpayer's federal income tax and state tax returns and reports. All of the taxpayer's books, records, and invoices must be open for examination at any time by the department of revenue. . . . Rule 254 is the Department’s administrative rule regarding recordkeeping. Rule 254(3) states, in relevant part: (b) It is the duty of each taxpayer to prepare and preserve all records in a systematic manner conforming to accepted accounting methods and procedures. Such records are to be kept, preserved, and presented upon request of the department or its authorized representatives which will demonstrate: (i) The amounts of gross receipts and sales from all sources, however derived, including barter or exchange transactions, whether or not such receipts or sales are taxable. These amounts must be supported by original source documents or records including but not limited to all purchase invoices, sales invoices, contracts, and such other records as may be necessary to substantiate gross receipts and sales.
...
(c) The records kept, preserved, and presented must include the normal records maintained by an ordinary prudent business person. Such records may include general ledgers, sales journals, cash receipts journals, bank statements, check registers, and purchase journals, together with all bills, invoices, cash register tapes, and other records or documents of original entry supporting the books of account entries. The records must include all federal and state tax returns and reports and all schedules, work papers, instructions, and other data used in the preparation of the tax reports or returns. Taxpayer contends it is entitled to the credit available for qualified aerospace preproduction development expenditures under RCW 82.04.4461(2). The credit is equal to the amount of qualified aerospace product development expenditures multiplied by a rate of 1.5 percent. Id. Under RCW 82.32.070(1), Taxpayer bears the burden of maintaining documentation necessary for the Department to verify its tax liability. Under Rule 254, Taxpayer’s documentation must include source documentation including purchase invoices . . . . In this case, Taxpayer did not maintain source documentation in the ordinary course of business tying expenditures to actual business activities or segregating expenditures by project. Taxpayer concedes that some of its projects are not qualified aerospace development so we cannot conclude that any specific expenditure falls within the definition of “aerospace product development” in

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RCW 82.04.4461(5)(b). Under RCW 82.32.070(1) and Rule 254, Taxpayer fails to meet its burden to provide documentation allowing the Department to verify its purported tax liability, including its claim for the aerospace development credit under RCW 82.04.4461(1)(a)(i). Moreover, using a subsequent estimate of R&D expenditures, calculated under IRC Sections 41 and 174, not the definition of “qualified aerospace product development expenditures” under RCW 82.04. 4461(5)(d), would impermissibly expand the application of the [credit]. Likewise, employing a proxy method for estimating qualified aerospace product development expenditures, like the gross income from aerospace development proposed by Taxpayer, instead of requiring a taxpayer to meet its burden under RCW 82.32.070(1) and Rule 254, would impermissibly expand the pool of taxpayers eligible for the credit. . . . DECISION AND DISPOSITION Taxpayer's petition is denied. Dated this 9th day of May 2023.