Washington Releases Determination on Aerospace Business Activity Classification

Monday, March 9th, 2015

A plane engine.

The Washington Department of Revenue ("Department") released a tax determination discussing rates for the Business and Occupations (B&O) tax.

The taxpayer was an out-of-state software development company for the aerospace industry. The taxpayer was audited and assessed B&O tax for its activities from 2007 through 2009. The Department classified the taxpayer's business as "services and other activities." The taxpayer argued that its activity should have been classified as the manufacture and development of aerospace technology. The taxpayer did not pay tax at the aerospace tax rate (which was a lower rate) during those years. In 2011, it filed its first annual report for its use of the aerospace classification.

Washington imposes B&O tax on business activities in the state. The tax rate depends on the business activity classification. The "aerospace manufacturing and product development" classification applies when the taxpayer (1) manufactures commercial airplanes or their components or (2) makes retail or wholesale sales of such airplanes or components. To use the classification, a taxpayer must file a report by March 31 of the year following the use of that classification's rate. A rate is "used" when the taxpayer pays it. If a taxpayer does not properly file for the aerospace classification and its activities do not automatically fall into another specifically designated classification, its activities are "services and other activities."

The taxpayer did not "use" the preferential rate from 2007-2009, so it had to pay tax for those years at the services rate. The taxpayer did not pay the aerospace classification rate from 2007-2009 and did not even discover the aerospace classification until 2010. The taxpayer also did not file any reports until 2011 - too late for activities from 2007 through 2009. The aerospace classification could not apply to activities in 2007 through 2009, and the taxpayer was properly assessed at the "services and other activities" rate.


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