Washington Advisory Explains Use Tax on Business Property Temporarily in State

July 3, 2017

Washington imposes use tax on all taxable tangible property brought into Washington after its purchase, including property only temporarily in the state, such as construction equipment.

On April 19, 2017, the Washington Department of Revenue issued an Excise Tax Advisory that instructs taxpayers on the state’s unusual use tax rules applicable to the temporary business use of property in the state. [1]

Use tax, as its name suggests, is imposed on the first use or consumption of tangible personal property and certain services in a state. A credit is provided for any state’s sales tax that the consumer paid at the time of purchase. [2] It is an obligation of the user of the property or services, and the states rely on taxpayers to self-report and remit the tax when the vendor has not done so.

We typically see two scenarios where businesses may encounter a need to report use tax: 1) sales tax was not assessed by the vendor on a taxable transaction for one of several reasons (e.g., seller does not have nexus/tax filing requirements in the customer’s state, seller is ignorant of tax laws, etc.) or 2) the property is taken from its state of purchase or delivery and moved to another state. This Washington tax advisory focuses on the second scenario.

Under Washington law, use tax is due whenever a business brings taxable property into the state, regardless of how long the property has been in service prior to its use in Washington. The advisory explains that there is a separate taxable event each time that property from outside the state is used in the state temporarily for business purposes.

  • When the property is used in Washington for less than 180 days during a 365-day consecutive period, use tax is due on the reasonable rental value of the property based on the time it is present in the state.
  • When the property is used in Washington for more than 180 days in a 365-day consecutive period, use tax is due on the full value of the property (e.g., the purchase price or retail selling price of a comparable product) as of the date the use exceeds 180 days. In this case, a credit may be claimed for any Washington use tax previously paid on the same property.

Normally, the tax should be computed based on the reasonable rental value for each separate temporary use until the property is either in Washington for more than 180 days during a 365-day period or the business has paid a total amount of use tax equal to the amount that would have otherwise been due on the full value of the property. In both cases, businesses may claim a credit for the sales or use tax already paid to other states on the same property. [3]

Other states provide different rules for computing or even imposing use tax when property is used outside the state for some period of time. For example, in Georgia, use tax is measured by the purchase price; however, if property is purchased and used outside the state for more than six months, then upon its first use in Georgia, the use tax is due and is measured by the lesser of the fair market value or the purchase price of the property. [4] California typically does not assess use tax when property is purchased outside the state, its first functional use is outside of the state and it is used outside the state for more than 90 days from the date of purchase to the date of entry into California. [5] As explained by this advisory, Washington has no such similar exclusion and instead imposes use tax on the temporary or permanent business use of all taxable tangible property brought into Washington after its purchase and use outside the state.

The Washington use tax law on temporary use most significantly impacts out-of-state service providers or real property contractors who bring property or equipment into the state to perform services or construction jobs. Construction contractors should be particularly careful due to the high-value of their equipment. Businesses that are based in states that do not impose a sales/use tax that could be credited against the Washington tax should also take care.

This advisory demonstrates the nuances of sales and use tax planning among the states and the need for businesses to be aware of their potential tax obligations from all of their interstate activities. Aprio’s SALT group has experience in addressing the state tax consequences of businesses that are engaged in multistate operations, and we can help your business navigate the demanding sales and use tax requirements to ensure that you do not encounter unexpected exposure. We constantly monitor these and other important state tax issues, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the June 2017 SALT Newsletter. You can view the full newsletter here.

[1] Washington Excise Tax Advisory ETA 3200.2017, 4/19/2017. These advisories are interpretive statements, and this ETA is interpreting section 82.12.010(7)(c) of the Washington statutes.

[2] The use tax is considered complementary to the sales tax in that a purchaser will only pay the greater of the two, and the tax is intended to make purchasers indifferent to crossing state lines or buying online when purchasing property. For example, New Jersey exempts clothing from sales tax, so if a New York resident travels to New Jersey to purchase clothing, he will not pay sales tax. However, upon returning to New York and wearing the clothing, he has made a taxable use of the clothing in New York and will owe New York use tax, which is imposed at the same rate as the New York sales tax and is based on the price the purchaser paid. Therefore, at the end of the day, from a sales/use tax perspective, the New York resident is in the same position as if he originally purchased the clothing in New York.

[3] Wash. Admin. Code 458-20-178(8). Taxes must be legally imposed and paid by the business to the other state or political subdivision and the business must have documentation in order to claim this credit.

[4] O.C.G.A. § 48-8-30(c).

[5] Cal. Code Regs. § 1620(b)(3).

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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