JLARC Preliminary Report: 2015 Tax Preference Performance Reviews

Horticultural services provided to farmers include services related to cultivating vegetables, fruits, grains, field crops, ornamental floriculture, and nursery products.  Horticultural services include:

• Soil preparation, such as plowing or weed control before planting;
• Crop cultivation, such as planting, thinning, pruning, or spraying; and
• Crop harvesting, such as threshing grain, mowing and baling hay, or picking fruit.

An activity defined as a retail sale is subject to retail sales or use tax.  Washington tax law defines landscape maintenance and horticultural services as “retail sales.” However, the Legislature specifically excluded “horticultural services provided to farmers” from the definition of a retail sale.  As a result, farmers do not have to pay sales or use tax when purchasing these services.

Income earned by persons from providing horticultural services to farmers is subject to business and occupation (B&O) tax under the service and other activities classification.

Pre-1993

Landscape maintenance (e.g., mowing lawns, pruning and trimming trees and plants, etc.) and horticultural services were considered service activities for tax purposes.  They were not subject to retail sales tax, but instead were subject to B&O tax under the service and other activities classification.

1993

As part of a bill intended to increase state revenue, the Legislature defined several personal, professional, and business services as retail sales, including landscape maintenance and horticultural services.  Defining these services as retail sales made the purchase of these services subject to sales or use tax.  The Legislature specifically excluded “horticultural services provided to farmers” from the definition of retail sale.  The preference has not been modified since enacted.

2014

The Legislature clarified that this preference does not apply to activities related to cultivating marijuana, usable marijuana, and marijuana-infused products.

What are the public policy objectives that provide a justification for the tax preference? Is there any documentation on the purpose or intent of the tax preference?

The Legislature did not state the public policy objective when it enacted this preference in 1993.  There is no public record of discussions about the public policy objective from committee hearings, bill reports, or floor debates during the 1993 session.

Legislative actions after the enactment of the 1993 legislation shed light on the Legislature’s intent in reclassifying some services as retail sales, but not others.  The actions express an intent to apply retail sales tax to discretionary services but not to mandatory, nondiscretionary services.

JLARC staff infer from these actions that the public policy objective of the preference is to treat horticultural services provided to farmers as nondiscretionary services, rather than as discretionary services subject to sales tax.

Action by JARRC:   Tax discretionary services, not mandatory activities

As the Department of Revenue worked on rules to implement the 1993 legislation, the question came before the Joint Administrative Rules Review Committee (JARRC) whether the Legislature intended to tax tree trimming under power lines as part of the retail sale of landscape maintenance and horticultural services.  In July 1994, JARRC determined that this was not the Legislature’s intent, stating that “the professional services which the amendment to the statute brought within the retail sales tax were services considered to be discretionary or even luxuries” and not mandatory activities, such as tree trimming under power lines.

Action by the Legislature:  Only tax discretionary spending on horticultural services

The 1995 Legislature reiterated JARRC’s position and clarified that the extension of the retail sales tax to landscape maintenance and horticultural services was not intended to include tree trimming and brush removal under power lines.  The legislation described the 1993 extension of retail sales tax as being for discretionary spending on landscape maintenance and horticultural services.  The Legislature characterized tree trimming and brush removal under power lines as activities that require nondiscretionary expenditures by electric utilities.

The 1995 bill placed the language clarifying the exemption for tree trimming under power lines right next to the exemption for horticultural services provided to farmers.  In doing so, the Legislature may have considered both types of expenditures as nondiscretionary, distinguishing them from discretionary landscape maintenance and horticultural services subject to sales tax.

What evidence exists to show that the tax preference has contributed to the achievement of any of these public policy objectives?

The tax preference has achieved the inferred public policy objective of treating horticultural services provided to farmers as nondiscretionary services rather than as discretionary activities subject to sales tax.

Who are the entities whose state tax liabilities are directly affected by the tax preference?

Beneficiaries of the preference are farmers who hire others to perform horticultural services for them.  Because this preference requires no accountability reporting, it is unclear how many of Washington’s 37,000 farms contract to have horticultural services performed for them.  According to the U.S. Department of Agriculture’s (USDA) 2012 Census of Agriculture, approximately 5,900 Washington farms reported hiring services closely related to horticultural services.

What are the past and future tax revenue and economic impacts of the tax preference to the taxpayer and to the government if it is continued?

Because there is no accountability reporting for this preference, it is not possible to measure the value of the preference using DOR tax return data.

JLARC staff estimated the beneficiary savings using USDA 2012 Census of Agriculture data for Washington agricultural custom work, which includes many horticultural services performed for farmers.

JLARC staff estimate beneficiaries saved $10.5 million in Fiscal Year 2014 and will save $21.1 million in the 2015-17 Biennium.  See Exhibit 1, below.

If the tax preference were to be terminated, what would be the negative effects on the taxpayers who currently benefit from the tax preference and the extent to which the resulting higher taxes would have an effect on employment and the economy?

If the tax preference were terminated, farmers would pay sales tax on their purchases of horticultural services to prepare for growing, cultivating, and harvesting their crops.

The effect of these terminations on employment and the economy would depend on the extent to which farmers could absorb the increased costs or pass them along to their customers.  Agricultural producers may be unable to pass along increased costs to their customers if the prices for their commodities are set in national or international markets.

Do other states have a similar tax preference and what potential public policy benefits might be gained by incorporating a corresponding provision in Washington?

JLARC staff reviewed the taxability of landscaping and horticultural services in the top ten major agricultural commodity producing states per 2012 USDA data, as well as in the neighboring states of Idaho and Oregon.  After determining whether the state imposed sales and use tax on landscaping services in general, JLARC staff reviewed whether the state extended sales and use tax to horticultural services performed for farmers.

Landscaping services in general are not subject to sales tax in seven of the other 12 states reviewed.  In the five other states where landscaping services are subject to sales tax, horticultural services for farmers are not subject to sales tax.  See Exhibit 2, below.

RCW 82.04.050(3)(e)

"Sale at retail," "retail sale."

*** CHANGE IN 2015 *** (SEE 1550.SL) ***

(1)(a) "Sale at retail" or "retail sale" means every sale of tangible personal property (including articles produced, fabricated, or imprinted) to all persons irrespective of the nature of their business and including, among others, without limiting the scope hereof, persons who install, repair, clean, alter, improve, construct, or decorate real or personal property of or for consumers other than a sale to a person who:

(i) Purchases for the purpose of resale as tangible personal property in the regular course of business without intervening use by such person, but a purchase for the purpose of resale by a regional transit authority under RCW 82.112.300 is not a sale for resale; or

(ii) Installs, repairs, cleans, alters, imprints, improves, constructs, or decorates real or personal property of or for consumers, if such tangible personal property becomes an ingredient or component of such real or personal property without intervening use by such person; or

(iii) Purchases for the purpose of consuming the property purchased in producing for sale as a new article of tangible personal property or substance, of which such property becomes an ingredient or component or is a chemical used in processing, when the primary purpose of such chemical is to create a chemical reaction directly through contact with an ingredient of a new article being produced for sale; or

(iv) Purchases for the purpose of consuming the property purchased in producing ferrosilicon which is subsequently used in producing magnesium for sale, if the primary purpose of such property is to create a chemical reaction directly through contact with an ingredient of ferrosilicon; or

(v) Purchases for the purpose of providing the property to consumers as part of competitive telephone service, as defined in RCW 82.04.065; or

(vi) Purchases for the purpose of satisfying the person's obligations under an extended warranty as defined in subsection (7) of this section, if such tangible personal property replaces or becomes an ingredient or component of property covered by the extended warranty without intervening use by such person.

(b) The term includes every sale of tangible personal property that is used or consumed or to be used or consumed in the performance of any activity defined as a "sale at retail" or "retail sale" even though such property is resold or used as provided in (a)(i) through (vi) of this subsection following such use.

(c) The term also means every sale of tangible personal property to persons engaged in any business that is taxable under RCW 82.04.280(1) (a), (b), and (g), 82.04.290, and 82.04.2908.

(2) The term "sale at retail" or "retail sale" includes the sale of or charge made for tangible personal property consumed and/or for labor and services rendered in respect to the following:

(a) The installing, repairing, cleaning, altering, imprinting, or improving of tangible personal property of or for consumers, including charges made for the mere use of facilities in respect thereto, but excluding charges made for the use of self-service laundry facilities, and also excluding sales of laundry service to nonprofit health care facilities, and excluding services rendered in respect to live animals, birds and insects;

(b) The constructing, repairing, decorating, or improving of new or existing buildings or other structures under, upon, or above real property of or for consumers, including the installing or attaching of any article of tangible personal property therein or thereto, whether or not such personal property becomes a part of the realty by virtue of installation, and also includes the sale of services or charges made for the clearing of land and the moving of earth excepting the mere leveling of land used in commercial farming or agriculture;

(c) The constructing, repairing, or improving of any structure upon, above, or under any real property owned by an owner who conveys the property by title, possession, or any other means to the person performing such construction, repair, or improvement for the purpose of performing such construction, repair, or improvement and the property is then reconveyed by title, possession, or any other means to the original owner;

(d) The cleaning, fumigating, razing, or moving of existing buildings or structures, but does not include the charge made for janitorial services; and for purposes of this section the term "janitorial services" means those cleaning and caretaking services ordinarily performed by commercial janitor service businesses including, but not limited to, wall and window washing, floor cleaning and waxing, and the cleaning in place of rugs, drapes and upholstery.  The term "janitorial services" does not include painting, papering, repairing, furnace or septic tank cleaning, snow removal or sandblasting;

(e) Automobile towing and similar automotive transportation services, but not in respect to those required to report and pay taxes under chapter 82.16 RCW;

(f) The furnishing of lodging and all other services by a hotel, rooming house, tourist court, motel, trailer camp, and the granting of any similar license to use real property, as distinguished from the renting or leasing of real property, and it is presumed that the occupancy of real property for a continuous period of one month or more constitutes a rental or lease of real property and not a mere license to use or enjoy the same.  For the purposes of this subsection, it is presumed that the sale of and charge made for the furnishing of lodging for a continuous period of one month or more to a person is a rental or lease of real property and not a mere license to enjoy the same;

(g) The installing, repairing, altering, or improving of digital goods for consumers;

(h) Persons taxable under (a), (b), (c), (d), (e), (f), and (g) of this subsection when such sales or charges are for property, labor and services which are used or consumed in whole or in part by such persons in the performance of any activity defined as a "sale at retail" or "retail sale" even though such property, labor and services may be resold after such use or consumption.  Nothing contained in this subsection may be construed to modify subsection (1) of this section and nothing contained in subsection (1) of this section may be construed to modify this subsection.

(3) The term "sale at retail" or "retail sale" includes the sale of or charge made for personal, business, or professional services including amounts designated as interest, rents, fees, admission, and other service emoluments however designated, received by persons engaging in the following business activities:

(a)(i) Amusement and recreation services including but not limited to golf, pool, billiards, skating, bowling, ski lifts and tows, day trips for sightseeing purposes, and others, when provided to consumers.

(ii) Until July 1, 2017, amusement and recreation services do not include the opportunity to dance provided by an establishment in exchange for a cover charge.

(iii) For purposes of this subsection (3)(a):

(A) "Cover charge" means a charge, regardless of its label, to enter an establishment or added to the purchaser's bill by an establishment or otherwise collected after entrance to the establishment, and the purchaser is provided the opportunity to dance in exchange for payment of the charge.

(B) "Opportunity to dance" means that an establishment provides a designated physical space, on either a temporary or permanent basis, where customers are allowed to dance and the establishment either advertises or otherwise makes customers aware that it has an area for dancing;

(b) Abstract, title insurance, and escrow services;

(c) Credit bureau services;

(d) Automobile parking and storage garage services;

(e) Landscape maintenance and horticultural services but excluding (i) horticultural services provided to farmers and (ii) pruning, trimming, repairing, removing, and clearing of trees and brush near electric transmission or distribution lines or equipment, if performed by or at the direction of an electric utility;

(f) Service charges associated with tickets to professional sporting events; and

(g) The following personal services: Physical fitness services, tanning salon services, tattoo parlor services, steam bath services, turkish bath services, escort services, and dating services.

(4)(a) The term also includes the renting or leasing of tangible personal property to consumers.

(b) The term does not include the renting or leasing of tangible personal property where the lease or rental is for the purpose of sublease or subrent.

(5) The term also includes the providing of "competitive telephone service," "telecommunications service," or "ancillary services," as those terms are defined in RCW 82.04.065, to consumers.

(6)(a) The term also includes the sale of prewritten computer software to a consumer, regardless of the method of delivery to the end user.  For purposes of this subsection (6)(a), the sale of prewritten computer software includes the sale of or charge made for a key or an enabling or activation code, where the key or code is required to activate prewritten computer software and put the software into use.  There is no separate sale of the key or code from the prewritten computer software, regardless of how the sale may be characterized by the vendor or by the purchaser.

The term "retail sale" does not include the sale of or charge made for:

(i) Custom software; or

(ii) The customization of prewritten computer software.

(b)(i) The term also includes the charge made to consumers for the right to access and use prewritten computer software, where possession of the software is maintained by the seller or a third party, regardless of whether the charge for the service is on a per use, per user, per license, subscription, or some other basis.

(ii)(A) The service described in (b)(i) of this subsection

(6) includes the right to access and use prewritten computer software to perform data processing.

(B) For purposes of this subsection (6)(b)(ii), "data processing" means the systematic performance of operations on data to extract the required information in an appropriate form or to convert the data to usable information.  Data processing includes check processing, image processing, form processing, survey processing, payroll processing, claim processing, and similar activities.

(7) The term also includes the sale of or charge made for an extended warranty to a consumer.  For purposes of this subsection, "extended warranty" means an agreement for a specified duration to perform the replacement or repair of tangible personal property at no additional charge or a reduced charge for tangible personal property, labor, or both, or to provide indemnification for the replacement or repair of tangible personal property, based on the occurrence of specified events.  The term "extended warranty" does not include an agreement, otherwise meeting the definition of extended warranty in this subsection, if no separate charge is made for the agreement and the value of the agreement is included in the sales price of the tangible personal property covered by the agreement.  For purposes of this subsection, "sales price" has the same meaning as in RCW 82.08.010.

(8)(a) The term also includes the following sales to consumers of digital goods, digital codes, and digital automated services:

(i) Sales in which the seller has granted the purchaser the right of permanent use;

(ii) Sales in which the seller has granted the purchaser a right of use that is less than permanent;

(iii) Sales in which the purchaser is not obligated to make continued payment as a condition of the sale; and

(iv) Sales in which the purchaser is obligated to make continued payment as a condition of the sale.

(b) A retail sale of digital goods, digital codes, or digital automated services under this subsection (8) includes any services provided by the seller exclusively in connection with the digital goods, digital codes, or digital automated services, whether or not a separate charge is made for such services.

(c) For purposes of this subsection, "permanent" means perpetual or for an indefinite or unspecified length of time.  A right of permanent use is presumed to have been granted unless the agreement between the seller and the purchaser specifies or the circumstances surrounding the transaction suggest or indicate that the right to use terminates on the occurrence of a condition subsequent.

(9) The term also includes the charge made for providing tangible personal property along with an operator for a fixed or indeterminate period of time.  A consideration of this is that the operator is necessary for the tangible personal property to perform as designed.  For the purpose of this subsection (9), an operator must do more than maintain, inspect, or set up the tangible personal property.

(10) The term does not include the sale of or charge made for labor and services rendered in respect to the building, repairing, or improving of any street, place, road, highway, easement, right-of-way, mass public transportation terminal or parking facility, bridge, tunnel, or trestle which is owned by a municipal corporation or political subdivision of the state or by the United States and which is used or to be used primarily for foot or vehicular traffic including mass transportation vehicles of any kind.

(11) The term also does not include sales of chemical sprays or washes to persons for the purpose of postharvest treatment of fruit for the prevention of scald, fungus, mold, or decay, nor does it include sales of feed, seed, seedlings, fertilizer, agents for enhanced pollination including insects such as bees, and spray materials to: (a) Persons who participate in the federal conservation reserve program, the environmental quality incentives program, the wetlands reserve program, and the wildlife habitat incentives program, or their successors administered by the United States department of agriculture; (b) farmers for the purpose of producing for sale any agricultural product; and (c) farmers acting under cooperative habitat development or access contracts with an organization exempt from federal income tax under 26 U.S.C. Sec. 501(c)(3) of the federal internal revenue code or the Washington state department of fish and wildlife to produce or improve wildlife habitat on land that the farmer owns or leases.

(12) The term does not include the sale of or charge made for labor and services rendered in respect to the constructing, repairing, decorating, or improving of new or existing buildings or other structures under, upon, or above real property of or for the United States, any instrumentality thereof, or a county or city housing authority created pursuant to chapter 35.82 RCW, including the installing, or attaching of any article of tangible personal property therein or thereto, whether or not such personal property becomes a part of the realty by virtue of installation.  Nor does the term include the sale of services or charges made for the clearing of land and the moving of earth of or for the United States, any instrumentality thereof, or a county or city housing authority.  Nor does the term include the sale of services or charges made for cleaning up for the United States, or its instrumentalities, radioactive waste and other by-products of weapons production and nuclear research and development.

(13) The term does not include the sale of or charge made for labor, services, or tangible personal property pursuant to agreements providing maintenance services for bus, rail, or rail fixed guideway equipment when a regional transit authority is the recipient of the labor, services, or tangible personal property, and a transit agency, as defined in RCW 82.104.015, performs the labor or services.

(14) The term does not include the sale for resale of any service described in this section if the sale would otherwise constitute a "sale at retail" and "retail sale" under this section.

Legislative Auditor Recommendation: Continue

The Legislature should continue the horticultural services preference because it is achieving the inferred public policy objective of treating horticultural services provided to farmers as nondiscretionary services rather than as discretionary services subject to sales tax.

Legislation Required: No.

Fiscal Impact: None.

Available December 2015.

Available December 2015.

If applicable, will be available December 2015.