Washington State Legal Decision Creates an Opportunity to Evaluate Your R&D Expenses

The Washington Department of Revenue issued a Special Notice regarding one of our cases, Terrapower LLC v. Dep’t of Revenue, BTA Docket No. 19-065 (2022).

In Terrapower, the issue was whether machinery and equipment (“M&E”) used in a research and development (“R&D”) operation qualified for Washington’s M&E sales tax exemption.

In the case, the Washington State Board of Tax Appeals agreed that a manufacturer engaged in an R&D operation does not need to “manufacture items for sale” to qualify for the M&E exemption from sales tax. The Department has previously taken the position that taxpayers who only manufacture items for commercial or industrial use did not qualify for the exemption. In the case, we argued — and the Board agreed — that the plain language of the M&E exemption applies to R&D operations, even if the manufacturer is not manufacturing items for sale. This decision is consistent with both the statutory language and the Legislature’s intent to incentivize businesses to perform R&D activities here in Washington state.

The Special Notice acknowledges the Washington State Board of Tax Appeals ruling, accepting that a manufacturer engaged in an R&D operation does not need to “manufacture items for sale” to qualify for the M&E exemption from sales tax and informs taxpayers that the Department does not plan to appeal the decision.

This decision creates an opportunity to review M&E used directly in your business’ R&D operation and creates potential refund opportunities for open years. Our team at Ballard Spahr can help your organization review your specific facts and purchases to determine how this decision can help you plan for future purchases, and help you understand whether this decision creates a refund opportunity for past purchases.

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