Interim guidance statement regarding the application of the tax deferral program for multifamily housing authorized by chapter 82.59 RCW

September 6, 2024

Purpose

This interim guidance explains the administration of chapter 82.59 RCW (E2SSB 6175). The Department of Revenue (Department) is currently engaged in the process of standard rulemaking for chapter 82.59 RCW and this guidance may be relied upon prior to adoption of the rule.

Background

Chapter 82.59 RCW establishes a limited sales and use tax deferral program to encourage the conversion of underutilized commercial property to multifamily housing units to increase affordable housing. If a legislative authority of any city finds that there are significant areas of underutilized commercial property and a lack of affordable housing within that city, that legislative authority may authorize a sales and use tax deferral program for investment projects within the city. This interim guidance statement explains how the Department will determine if an investment project qualifies for the deferral. Applications for the deferral will not be accepted after June 30, 2034.

Examples

Examples found in this interim guidance statement identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all facts and circumstances.

Definitions

Applicable definitions for this deferral program may be found under RCW 82.59.010. This guidance statement will focus upon and clarify the definitions most critical to eligibility and the Department’s administration of the program:

“Eligible investment project” means an investment in multifamily housing in a city, including labor, services, and materials incorporated in the planning, installation, and construction of the project, that has received a conditional certificate of program approval from the legislative authority of that city.
- To qualify as an “eligible investment project” under this program, the property must be an “underutilized commercial property” that will be converted to primarily multifamily housing units, with at least 10 percent of the units rented or sold as affordable housing to low-income households. In a mixed-use project, only the ground floor of a building may be used for commercial purposes with the remainder dedicated to multifamily housing units. RCW 82.59.040(1).
- Chapter 82.59 RCW contemplates only investment projects that convert existing underutilized commercial properties into multifamily housing. The demolition of an existing structure to be replaced by a new building for multifamily housing will not qualify for the deferral.
- An investment project includes investment in “related facilities,” which may include, but is not limited to:
  - Facilities supporting the use of the multifamily housing, such as playgrounds, sidewalks, and driveways, parking lots, covered parking structures;
  - Fitness facilities for residents (e.g., gyms, pools, recreational courts, bicycle storage areas);
  - Laundry areas;
  - Landscaping (does not include activities initiated prior to issuance of a building permit);
  - Dining facilities for residents;
  - Cooking facilities for residents;
  - Event spaces for use by residents;
  - Lobbies and/or elevators to access residences and commercial spaces;
  - Conference rooms and other business facilities (e.g., leasing office, communal office space for use by residents, etc.);
  - Dog runs/parks;
  - Residential storage areas;
  - Electric vehicle charging stations for residents;
  - Security fencing and/or gates for the project;
  - Mailbox stations;
  - Spaces used to manage and maintain the project (e.g., tool shed);
  - Facilities used for business use in mixed-use development; or
  - Other facilities approved by the department on a case-by-case basis.
“Conditional recipient” means an owner of commercial property granted a conditional certificate of program approval, which includes any successor owner of the property.
“Multifamily housing” means a building or a group of buildings having four or more dwelling units that are not designed or used as transient accommodations, hotels or motels. Multifamily units must result from rehabilitation or conversion of vacant, underutilized, or substandard buildings to multifamily housing.
“Affordable housing” means housing either owned or rented by low-income households whose monthly housing costs, including utilities other than telephone, do not exceed 30 percent of the household's monthly income.
"Low-income household" means a single person, family, or unrelated persons living together whose adjusted income is at or below 80 percent of the median family income adjusted for family size, for the county, city, or metropolitan statistical area, where the project is located, as reported by the U.S. Department of Housing and Urban Development.
“Underutilized commercial property” means an entire property or portion of property currently used or intended to be used by a business for a qualifying use: retailing, office-related or administrative activities.
- If the property is used partly for a qualifying use and partly for other purposes, the applicable tax deferral must be determined by apportionment of the costs of construction under this interim guidance statement. Areas of the property that are outside of the building or structure defined as an “underutilized commercial property” may qualify only if they are used for retailing, office-related, or administrative activities.
- The Department will generally presume that vacant land does not qualify as underutilized commercial property. To rebut this presumption, the applicant must provide adequate, material substantiation to show that the property was used or was intended to be used for a qualifying use.
“Qualifying use” means the use or intended use of property, or portions thereof, for retailing, office-related, and administrative activities, collectively referred to in this guidance as “qualifying activities.”
“Qualifying activities” include selling goods and services to customers for their consumption, and professional, clerical, or administrative activities such as human resources, accounting, legal, sales and marketing, or executive management activities.
- Examples of qualifying activities that are eligible for deferral include, but are not limited to: the use of copy rooms, employee offices, reception areas, office libraries, storage rooms, conference rooms, and call centers, and/or sales activities.
- The following nonexclusive list of activities are not considered to be qualifying activities and are, therefore, not eligible for deferral: manufacturing, wholesaling, warehousing, and similar activities.
“Intended to be used” means that the underutilized commercial property is expected to be used for “qualifying uses” (i.e., retailing, office-related or administrative activities), at the time of application to the city for conditional approval.
- For a conditional recipient to establish that a property is intended to be used for a “qualifying use,” the applicant must include adequate substantiation with their application to the Department that shows this intent. Adequate substantiation may include, but is not necessarily limited to, the following:
  - Blueprints or site plans,
  - Current or historical zoning,
  - Building permits,
  - Marketing materials,
  - Leasing agreements,
  - Sales agreements,
  - Promotional materials, or
  - Similar documents showing the intended use of the property is for a “qualifying use.”
  - Some documents may be insufficient by themselves to show intent, but in combination with other documentation may be sufficient to adequately substantiate intent.
- For property with existing structures and property already under commercial development, the Department will review the substantiation provided to determine if it adequately shows intent to use the property for a qualifying purpose.
“Governing authority” means the local legislative authority of a city having jurisdiction over the property for which a deferral may be granted under chapter 82.59 RCW. The governing authority creates the sales and use tax deferral program for its city.

Example 1: Underutilized commercial property currently used for qualifying activities.

Facts: Applicant currently leases commercial property to a tenant that uses the entire property for their restaurant business. The property has a kitchen, dining area, and an office area used for accounting and other managerial activities for the restaurant. The Applicant’s lease with the tenant establishes that the property will be used for this purpose.

Result: Presuming all other requirements of the statute are met, Applicant’s property qualifies as underutilized commercial property as the applicant has provided adequate substantiation that the entire property is being used for a “qualifying use.” Restaurant activities qualify as “qualifying activities” as they involve the sale of food to customers. The tenant uses the remaining areas of the property to conduct or manage its restaurant business, so these other areas also qualify because the space is being used for eligible “qualifying activities.”

Example 2: Underutilized commercial property intended to be used for qualifying activities.

Facts: Applicant’s commercial building is currently vacant, but Applicant has previously leased the entire property to other businesses for use as office space. Applicant’s marketing materials for the property promote the building as containing numerous offices, meeting areas, storage rooms, and a call center.

Result: Presuming all other requirements of the statute are met, applicant’s building qualifies as underutilized commercial property as the applicant has provided adequate substantiation that the entire property is intended to be used for eligible “qualifying activities.”

Example 3: Underutilized commercial property under construction to be used for qualifying activities.

Facts: Applicant is in the process of constructing a commercial property. While construction is not complete, original blueprints and marketing materials used for promotional purposes demonstrate that the property is entirely comprised of meeting rooms, space for cubicles and offices, a mail room, and a reception area.

Example 4: Vacant land marketed as being usable for qualifying activities.

Facts: Applicant owns a vacant lot and plans to sell the entire property to a developer. The marketing and promotional materials for the vacant lot provide that the site may be used for qualifying activities.

Result: Applicant’s property does not qualify as underutilized commercial property because it is a vacant lot. The marketing and promotional materials do not adequately substantiate the intent that the property will be used for one or more eligible “qualifying uses.”

Application to the Department

After receiving a conditional certificate of approval from the local jurisdiction, but before the initiation of the construction of the investment project, conditional recipients must submit an initial application to the Department. Application forms are available at dor.wa.gov, or by calling the Department at 360-534-1443. Applications approved by the Department are not confidential and are subject to disclosure. For an investment project that involves multiple buildings, a conditional recipient must submit a separate application before the initiation of construction for each building.

Applications to the Department must include the following:

The property owner’s information,
The contact person for the investment project,
The location of the investment project (including the address and parcel number),
A detailed description of the property as it currently exists and the square footage of the property that is currently used, or intended to be used, for a “qualifying use” prior to conversion to multifamily housing.
The description should include the building or buildings to be remodeled, other structures, parking, and other related facilities. The Department may request a schematic of the site, including square footage, and may tour the property.
A detailed description of the planned investment project (which must be multifamily housing and affordable housing), including estimated square footage,
A copy of the conditional certificate of approval issued by the local jurisdiction,
Substantiation that the applicant has a current active business license for both the city and the state (as applicable),
Estimated investment project construction costs,
Estimated time schedules for initiation of construction, completion and operation,
Waiver of the 4-year limitation under RCW 82.32.100, and
Any additional information requested by the Department.

The Department’s application review process:

The Department has 60 days to approve or deny a complete application.
If an application is approved: The Department will issue a tax deferral certificate for each eligible investment project and notify the conditional recipient of the documentation needed to substantiate the amount of sales and use tax actually deferred (e.g., purchase invoices, sales and use tax deferral certificate, and other supporting documentation such as building permits and construction contracts). The Department will also state on the certificate the estimated amount of qualifying taxable purchases the conditional recipient is eligible to make and the time period for which the certificate is valid.
If an application is denied: A conditional recipient may request a review of the Department’s denial of their tax deferral application through the Department’s informal administrative review process within 30 days of the date of the denial notice. See WAC 458-20-100.

The Department’s application form advises conditional recipients that they should retain and make available for the Department: purchase invoices (for example, accounts payable and receipts), supporting documentation for the construction, such as a building permit issued for the deferral project and construction contracts, the original Sales and Use Tax Deferral Certificate, and any other documentation the Department may advise the conditional recipient to retain.

A tax deferral certificate may be used only for purchases for the investment project for which it was issued until issuance of a certificate of occupancy

A tax deferral certificate issued under this program is valid only during active construction of a qualified investment project and expires the day the local jurisdiction issues a certificate of occupancy for the investment project. The conditional recipient may only use the deferral certificate to defer sales and use taxes due on eligible investment projects.

Conditional recipient required to notify the Department if the project exceeds its estimated investment project costs

The conditional recipient must notify the Department, in writing, when the value of the investment project reaches the estimated cost as stated on their tax deferral certificate. If the project is not operationally complete, the certificate holder may request an amended certificate stating a revised amount on which the deferral taxes are requested along with an explanation for the increase in estimated costs. Requests must be mailed or emailed to the Department at DORdeferrals@dor.wa.gov.

City required to notify the Department if the project is not operationally complete on or before the projected completion date

If an investment project has reached the estimated completion date and the project is not operationally complete due to circumstances beyond the control of the conditional recipient, the city may extend the deadline for completion of the work in accordance with RCW 82.59.070. If extended, the city must notify the Department, either by mail or email, of the approved extension prior to the expiration date on the deferral certificate.

Partially qualifying properties may be apportioned

If, at the time of application to the governing authority for conditional approval, a portion of an applicant’s property is not used, or intended to be used, for a qualifying use (retailing, office-related, or administrative activities), that portion does not qualify for tax deferral treatment and the underutilized commercial property must be apportioned. The apportionment method used depends on the status of the eligible investment project.

Deferral estimate (required before issuance of deferral certificate)

The Department will use the estimated figures in the conditional recipient’s application to the Department to provide a preliminary estimate of the amount of costs for which taxes may be deferred. The Department will use the following ratio to apportion an eligible investment property:

(sq.ft.with qualifying use÷total sq.ft.of investment property)
×estimated total costs of investment project
= estimated purchases eligible for the deferral program

Example of a partially qualifying property

Facts: An applicant seeks a deferral to convert a church into multifamily housing. Of the total 5,000 square feet of space in the church, a 4,000 square foot area is used for religious activities and a 1,000 square foot area is used by staff for administrative activities, such as accounting, organizing community events, and other administrative activities. The applicant estimates that project will cost about $1,000,000. The combined sales/use tax rate at this location is 9%.

Result: Presuming all other requirements of the statute are met, the 1,000 square feet of space used for office-related and administrative activities are used for a “qualifying use,” but the remaining 4,000 square feet are not because space used for religious services is not used for qualifying activities. In approving the application, the Department will estimate the costs that may be deferred as follows:

(1,000 sq.ft.with qualifying use÷5,000 total sq.ft.of investment property)
×$1M estimated total costs of investment project
=$200,000 estimated cost eligible for deferral program

1,000 square feet of the investment property with a qualifying use is divided by the 5,000 total square footage of the property (which equals 20%). 20% is multiplied against the estimated cost of $1,000,000 to equal $200,000. When the Department issues the deferral certificate to the applicant, the certificate will state an estimated amount of $200,000 for qualifying purchases. Although it will not appear on the deferral certificate, the estimated tax eligible for the deferral will be $18,000 (9% tax rate multiplied by $200,000 of estimated costs).

Department certification of final tax amount allowed for deferral

Conditional recipient required to notify the Department when the investment project is operationally complete

Within 30 days after the local jurisdiction issues the conditional recipient a certificate of occupancy for the eligible investment project, the conditional recipient must notify the Department in writing that the eligible investment project is operationally complete. The project is operationally complete once it can be used for its intended purpose as described in the application (primarily multifamily housing with at least 10% affordable housing). The governing authority of the city is not required to notify the Department, but is encouraged to do so to facilitate timely administration.

Department to independently certify final tax deferral amount

Upon receiving notification from the conditional recipient that the eligible investment project is operationally complete, the Department will certify the project and determine the final amount of sales and use taxes that qualify for deferral. The verification will consider actual costs for eligible purposes in the investment project, and multiply that by the applicable combined state and local retail sales tax rate to determine the amount of tax that may be deferred. As a part of the certification process, the Department will tour the eligible investment property and review the records preserved by the conditional recipient to substantiate the eligibility of its purchases. The final deferral figure will supersede the Department’s preliminary deferral estimate.

Taxes on purchases ineligible for deferral are immediately due with interest

If the Department determines that purchases are not eligible for deferral, the conditional recipient is required to pay the sales and use tax on purchases and is subject to interest, but not penalties, on ineligible tax deferral amounts. Conditional recipients who are denied the tax deferral may pursue an informal administrative review of the Department’s decision, as provided in WAC 458-20-100.

Certain mixed-use projects (both residential and commercial) may be eligible for deferral

Local jurisdictions may approve certain mixed-use projects (i.e., projects that have both a commercial and residential component). However, commercial activity is restricted to the ground floor of the building and the remainder of the building must be used for multifamily housing units. “Ground floor” means the building floor that is level with the street. Points of access to both the commercial and residential components of a mixed-use project that are not on the ground floor may qualify as “related facilities” to an eligible investment project. Applicants are encouraged to request a letter ruling from the Department prior to submitting an application to determine if the facilities in their investment project qualify for deferral.

Whether an addition is eligible for deferral depends on the facts and circumstances

The eligibility of an addition will depend on the facts and circumstances at issue. All areas of an investment project must qualify for the deferral, including any addition. Otherwise, areas that do not qualify will be apportioned out. If an applicant is unsure whether their project qualifies for the deferral, they may contact the Department by phone at 360-534-1443, or email at DORdeferrals@dor.wa.gov.

Reporting requirements to the Department

Beginning the year following the date the project was operationally complete, the conditional recipient is required to file annual tax performance reports by May 31st for a period of 10 years. This is required even if the audit certification is not yet complete or if the investment project has not been audited. For more information on the requirements to file annual tax performance reports, please refer to WAC 458-20-267.

Note that the applicant is also required to file reports with the city, as detailed in RCW 82.59.080.

Compliance with requirements of chapter 82.59 RCW

If a conditional recipient maintains the property for qualifying purposes for at least 10 years, the conditional recipient is not required to repay the deferred sales and use taxes.

Noncompliance with chapter 82.59 RCW

If the conditional recipient is no longer in compliance with program requirements after the Department has issued a sales and use tax deferral certificate and the conditional recipient has received a certificate of occupancy, all deferred sales and use taxes are immediately due and payable. Interest will be assessed retroactively to the date of deferral.

City required to notify the Department of noncompliance

If the city finds that a portion of an investment project has changed or will change to disqualify the recipient for sales and use tax deferral eligibility under chapter 82.59 RCW, the city must notify the Department. If a conditional recipient voluntarily opts to discontinue compliance with the requirements of chapter 82.59 RCW, the recipient must notify the city and Department within 60 days of the change in use or intended discontinuance. A debt for deferred taxes will not be extinguished by insolvency or other failure of the recipient.

Transfer of ownership transfers the deferral

Transfer of ownership does not terminate the deferral. The deferral is transferred, subject to the successor meeting the eligibility requirements of chapter 82.59 RCW.

Transferor required to notify the Department of ownership transfer

The transferor must promptly notify the Department of the transfer and provide all information necessary for the Department to transfer the deferral. Failure of the transferor to notify the Department results in all deferred sales and use taxes becoming immediately due and payable with interest, calculated retroactively back to the date of the deferral. A successor to an investment project is liable for the full amount of unpaid, deferred taxes under the same terms and conditions as the original recipient of the deferral. For additional information on successorship or quitting business refer to WAC 458-20-216.

Conditional applicants may apply for other tax exemptions for multifamily housing

The owner of an underutilized commercial property may also apply for the multiple-unit housing property tax exemption program under chapter 84.14 RCW. Applicants who are receiving a property tax exemption under chapter 84.14 RCW should note that the amount of affordable housing units required for eligibility under this program is in addition to the affordability conditions in chapter 84.14 RCW.

Taxpayer instructions

This interim guidance statement will remain in effect until the Department issues final guidance or cancels the interim statement.