Machinery and equipment used in research and development

The M&E exemption applies to sales of machinery and equipment used directly in an R&D operation by a manufacturer or processor for hire. Machinery and equipment is used directly in an R&D operation if it is integral to R&D as defined in RCW 82.63.010.

Examples of machinery and equipment include computer hardware, software, data processing equipment, and laboratory equipment. Machinery and equipment does not include property with a useful life of less than one year. ETA 3127

Integral to research and development operation: Machinery and equipment is integral to an R&D operation if R&D cannot be accomplished without such machinery and equipment. For example, a laboratory table is integral to an R&D operation. Likewise, telephones, computer hardware (e.g., cables, scanners, printers, etc.), and computer software (e.g., Word, Excel, Windows, Adobe, etc.) used in a typical workstation for an R&D personnel are integral to an R&D operation. Also, a chair used in a laboratory workstation is integral to an R&D operation. A chair used in a lobby area, however, is not integral to an R&D operation. Similarly, decorative artwork is not integral to an R&D operation.

Research and development operation: "R&D operation" means engaging in R&D by a manufacturer or processor for hire. R&D can be performed away from a manufacturing site, and the machinery and equipment used to perform such R&D may still qualify for the M&E exemption.

R&D includes the following activities:

Activities performed to discover technological information,
Technical and non-routine activities concerned with translating technological information into new or improved products, processes, techniques, formulas, inventions, or software, and
Exploration of a new use for an existing drug, device, or biological product, if the new use requires separate licensing by the federal food and drug administration under chapter 21, C.F.R., as amended.

R&D does not include the following activities:

Adaptation or duplication of existing products without substantial improvement by application of the technology,
Surveys and studies,
Social science and humanities research,
Market research or testing,
Quality control,
Sale promotion and service,
Computer software developed for internal use, and
Research to improve style, taste, or seasonal design.

Refer to WAC 458- 20-24003 for additional information on what constitutes R&D.

Majority use requirement for machinery and equipment used in research and development: Machinery and equipment used in R&D operation must satisfy the majority use threshold in order to qualify for the M&E exemption. Machinery and equipment that does not satisfy the majority use threshold is subject to use tax at the time the majority use threshold is no longer met. For example, a laboratory table used solely for qualifying R&D purposes and then converted solely to non-qualifying uses is subject to use tax at the time of conversion.

What is not eligible for the exemption?

In addition to items that are not eligible because they do not meet the used directly test or fail to overcome the majority use threshold, there are four categories of items that are statutorily excluded from eligibility. The following property is not eligible for the M&E exemption:

Hand-powered tools. Screw drivers, hammers, clamps, tape measures, and wrenches are examples of hand-powered tools. Electric powered, including cordless tools, are not hand-powered tools, nor are calipers, plugs used in measuring, or calculators.
Property with a useful life of less than one year. All eligible machinery and equipment must satisfy the useful life criteria, including repair parts and replacement parts. For example, items such as blades and bits are generally not eligible for the exemption because, while they may become component parts of eligible machinery and equipment, they generally have a useful life of less than one year. Blades generally having a useful life of one year or more, such as certain sawmill blades, are eligible. (See subsection on thresholds to determine useful life.)
Buildings, other than machinery and equipment that is permanently affixed to or becomes a physical part of a building. Buildings provide work space for people or shelter machinery and equipment or tangible personal property. The building itself, and some of its components, such as walls, partitions, floors, ceilings, windows, and doors, are not eligible for the exemption. The industrial fixtures and support facilities that become affixed to or part of the building might be eligible. The subsequent real property status of industrial fixtures and support facilities does not affect eligibility for the exemption.
Building fixtures that are not integral to the manufacturing operation, testing operation, or research and development operation that are permanently affixed to and become a physical part of a building, such as utility systems for heating, ventilation, air conditioning, communications, plumbing, or electrical. Examples of nonqualifying fixtures are: Fire sprinklers, building electrical systems, or washroom fixtures. Fixtures that are integral to the manufacturing operation might be eligible, depending on whether the item meets the other requirements for eligibility, such as the used directly test.

Useful life

Property with a useful life of less than one year is not eligible for the M&E exemption. The useful life threshold identifies items that do not qualify for the exemption, such as supplies, consumables, and other classes of items that are not expected or intended to last a year or more.

For example, tangible personal property that is acquired for a one-time use and is discarded upon use, such as a mold or a form, has a useful life of less than one year and is not eligible.

If it is clear from taxpayer records or practice that an item is not used for at least one year, the item is not eligible, regardless of the answers to the four threshold questions.

Determining useful life

Assuming the machinery and equipment meets all of the other M&E requirements and does not have a single one-time or is not discarded during the first year, useful life can be determined by answering the following questions for an individual piece of machinery and equipment:

Is the machinery and equipment capitalized for either federal tax purposes or accounting purposes?
- If the answer is "yes," it qualifies for the exemption.
- If the answer is "no," go to the next question.
Is the machinery and equipment warranted by the manufacturer to last at least one year?
- If the answer is "yes," it qualifies for the exemption.
- If the answer is "no," go to the next question.
Is the machinery and equipment normally replaced at intervals of one year or more, as established by industry or business practice? (This is commonly based on the actual experience of the person claiming the exemption.)
- If the answer is "yes," it qualifies for the exemption.
- If the answer is "no," go to the next question.
Is the machinery and equipment expected at the time of purchase to last at least one year, as established by industry or business practice? (This is commonly based on the actual experience of the person claiming the exemption.)
- If the answer is "yes," it qualifies for the exemption.
- If the answer is "no," it does not qualify for the exemption.

The majority use threshold

Machinery and equipment both used directly in a qualifying operation and used in a non- qualifying manner is eligible for the exemption only if the qualifying use satisfies the majority use requirement. Examples of situations in which an item of machinery and equipment is used for qualifying and non-qualifying purposes include:

The use of machinery and equipment in manufacturing and repair activities, such as using a power saw to make cabinets in a shop versus using it to make cabinets at a customer location;
The use of machinery and equipment in manufacturing and constructing activities, such as using a forklift to move finished sheet rock at the manufacturing site versus using it to unload sheet rock at a customer location; and
The use of machinery and equipment in manufacturing and transportation activities, such as using a mixer truck to make concrete at a manufacturing site versus using it to deliver concrete to a customer.

Majority use can be expressed as a percentage, with the minimum required amount of qualifying use being greater than fifty percent compared to overall use. To determine whether the majority use requirement has been satisfied, the person claiming the exemption must retain records documenting the measurement used to substantiate a claim for exemption. Majority use is measured by looking at the use of an item during a calendar year using any of the following:

Time. Time is measured using hours, days, or other unit of time, with qualifying use of the M&E the numerator, and total time used the denominator. Suitable records for time measurement include employee time sheets or equipment time use logs.
Value. Value means the value to the person, measured by revenue if the qualifying and non-qualifying uses both produce revenue. Value is measured using gross revenue, with revenue from qualifying use of the M&E the numerator, and total revenue from use of the M&E the denominator. If there is no revenue associated with the use of the M&E, such as in-house accounting use of a computer system, the value basis may not be used. Suitable records for value measurement include taxpayer sales journals, ledgers, account books, invoices, and other summary records.
Volume. Volume is measured using amount of product, with volume from qualifying use of the M&E the numerator and total volume from use of the M&E the denominator. Suitable records for volume measurement include production numbers, tonnage, and dimensions.
Other comparable measurement for comparison. The department may agree to allow a taxpayer to use another measure for comparison, provided that the method results in a comparison between qualifying and non-qualifying uses. For example, if work patterns or routines demonstrate typical behavior, the taxpayer can satisfy the majority use test using work site surveys as proof.

Each piece of M&E does not require a separate record if the taxpayer can establish that it is reasonable to bundle M&E into classes. Classes may be created only from similar pieces of machinery and equipment and only if the uses of the pieces are the same. For example, forklifts of various sizes and models can be bundled together if the forklifts are doing the same work, as in moving wrapped product from the assembly line to a storage area. An example of when not to bundle classes of M&E for purposes of the majority use threshold is the use of a computer that controls a machine through numerical control versus use of a computer that creates a camera ready page for printing.

Typically, whether the majority use threshold is met is decided on a case-by-case basis, looking at the specific manufacturing operation in which the item is being used. However, for purposes of applying the majority use threshold, the department may develop industry-wide standards. For instance, the aggregate industry uses concrete mixer trucks in a consistent manner across the industry. Based on a comparison of selling prices and delivery prices the department has determined that concrete trucks overcome the majority use threshold. Only in those limited instances where it is apparent that the use of the concrete truck is atypical for the industry would the taxpayer be required to provide recordkeeping on the use of the truck in order to support the exemption.

Other types of property – Do they qualify for the M&E exemption?

Prototypes: Property that is the object of the manufacturing activity does not itself qualify for the exemption. The thing being made is the object of the activity and as such is not “machinery and equipment” as that phrase is used in the M&E exemption. If a prototype is not used to make, build, or test a different product or used in some supportive capacity (used directly) in stages of the manufacturing operation, its use does not qualify. Any product made by a manufacturer and used in a qualifying manner potentially qualifies for exemption – subject to not being the object of the activity itself. For example, a “prototype” used as a manufacturing mockup to calibrate tools will qualify as machinery and equipment. A prototype used as a test bed will qualify if it can be shown that the information gained from the test will be used for a different product or process, and will not be used to refine or change the product itself.

The phrase ‘test bed” means that the prototype is used to test other property, and not the prototype itself. A “test bed” typically evaluates how property operates under a range of working conditions. If the prototype is being tested itself, then it is not being used as a “test bed.” ETA 3126

Presumption: In order to determine whether a product made by a manufacturer is eligible for the exemption, an examination of the facts, as supported by documentation or other credible evidence regarding the property’s use, must be undertaken. The Department presumes that a manufacturer of an item that is being developed or manufactured is not using the property in a manner eligible for the M&E exemption. To overcome this presumption, the manufacturer must establish that the item is being used to test something other than itself. This determination will be done on a case by case basis, and will in each case be based on the individual facts and circumstances. For example, in order for a prototype of a fire extinguisher to be eligible for use in an R&D operation, use of the prototype must be part of activities relating to another product and not be in regard to R&D on the fire extinguisher itself.

The Department also presumes that a product and all of its components are the thing being tested. The burden is on the taxpayer to demonstrate, and support by documentation or other credible evidence, that the product is being used as a “test bed.” Documentation will need to reflect the basis for the activity and the intent of the manufacturer.

Reporting/Documentation

Buyers must provide the seller with a properly completed Manufacturer’s Sales and Use Tax Exemption Certificate.

Sellers remain subject to the retailing B&O tax on all sales of machinery and equipment to consumers if delivery is made within the state of Washington. The retail sales tax exemption must be itemized on the Deduction Detail page of the excise tax return under the explanation “Sale of Manufacturing Mach/Equip; Install Labor.” The seller must retain the certificate in their records.

Laws and Rules

RCW 82.08.02565 Sales of manufacturing machinery and equipment

RCW 82.12.02565 Use of manufacturing machinery and equipment

WAC 458-20-135 Extracting Natural Products

WAC 458-20-13501 Timber Harvest Operations

WAC 458-20-136 Manufacturers and processors-for-hire, fabricating

WAC 458-20-13601 Manufacturing Machinery and Equipment Sales and Use Tax Exemption

ETA 3117 Manufacturers’ Machinery and Equipment Exemption

ETA 3118 Rental of tangible personal property and rental of equipment with an operator

ETA 3119 Pollution control equipment

ETA 3120 Electrical apparatus and utility systems

ETA 3121 Devices

ETA 3122 Design and Product Development

ETA 3123 Manufacturing site

ETA 3124 Buildings, fixtures, and support facilities

ETA 3125 Computers

ETA 3126 Prototypes

ETA 3127 Research and Development