JLARC Final Report: 2016 Tax Preference Performance Reviews

Report 17-02, January 2017

The Legislature established this preference to promote the economic development of Washington’s aerospace cluster and increase tax revenues by promoting a competitive marketplace for storing and modifying unfurnished, noncommercial aircraft.

Nonresidents do not pay sales or use tax on their purchases in Washington of:

1. Large, private airplanes; and
2. Labor and services performed in Washington to repair, clean, alter, or improve large, private airplanes they own.

The sales and use tax exemption applies only when the large private airplane is not required by law to be registered with or file annual renewals with the Aviation Division of the Washington State Department of Transportation (WSDOT Aviation).  See the Legal History tab for additional detail.

The preference took effect on January 1, 2014, and is scheduled to expire July 1, 2021.

A “large, private airplane”:

• Is not used in interstate commerce;
• Is not owned or leased by a government entity;
• Weighs more than 41,000 pounds (generally Boeing 737s and above); and
• Is assigned a category A, B, C, or D aircraft weight class by the Federal Aviation Administration.

2013

The Legislature enacted this preference.  The bill included an intent section stating that the public policy objective was to promote economic development of the state’s aerospace cluster and increase state tax revenues by promoting a competitive marketplace for storing and modifying unfurnished, noncommercial aircraft.

The bill included requirements that firms using the preference notify and provide documentation to the Washington State Department of Transportation (WSDOT) Aviation division within 90 days of arrival that the airplane was in Washington for continual storage of at least one year or exclusively for repair, alteration, or reconstruction.

This tax preference was part of a bill passed during the second special session, intended to modify Washington’s tax policy in several ways to encourage additional growth of the aerospace cluster in the state. 

In addition to this preference, the 2013 bill also had the following effects, which are not part of this review.

Industry representatives testified and provided information to the Legislature claiming the changes created in the bill would create 1,195 jobs, each with wages and benefits of $70,000-$80,000 per year, add B&O tax revenue, and grow the aerospace industry in Washington by making Washington’s tax structure “more competitive.”

The preference took effect January 1, 2014, and is scheduled to expire July 1, 2021.

During the 2013 third special session, the Legislature extended the expiration date and preferential tax treatment provided on a different package of aerospace tax preferences.  JLARC staff reviewed this package of aerospace tax preferences in 2014.

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?

In the intent section for the preference, the Legislature stated its objective was to promote economic development. The bill also directed JLARC staff to measure the net impact of the preference on state tax revenues.

Promote Economic Development

The Legislature stated the public policy objective for this preference was to:

. . . promote the economic development of our state's aerospace cluster and increase the tax revenues collected by the state through promoting a competitive marketplace for storing and modifying unfurnished, noncommercial aircraft.

The Legislature noted that Washington was losing jobs in this industry to other states, resulting in the loss of high-wage jobs and new tax revenue.  The bill also stated that Washington tax statutes were an impediment to encouraging development of aerospace clusters in the state.  The Legislature concluded it intended to modify Washington’s tax policy to encourage aerospace cluster development within the state and increase tax revenues.

Measure Net Impact of the Tax Preference

The Legislature directed JLARC staff to:

• Estimate the net impact of the preference on state tax revenues by comparing the decrease in state revenues resulting from the changes made in the bill with the additional tax revenues generated from the direct, indirect, and induced economic impacts from the changes.
• Estimate, to the extent practicable, job growth in the aerospace cluster resulting from the tax preference(s) changes.

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

It is too early to determine the extent to which this preference is achieving its public policy objectives.

Promote Economic Development

After extensive research, JLARC staff found no evidence of qualifying sales of large, private airplanes to nonresidents or of qualifying modification work on such airplanes.

JLARC staff worked with the Department of Revenue (DOR) to identify any evidence of use of the preference. These efforts included:

• Contacting the businesses that had expressed interest during the 2013 legislative session in performing this work. The businesses reported no qualifying work.
• Analyzing tax return deduction detail to look for businesses selling or modifying large, private airplanes to or for nonresidents. There were no qualifying sales.
• Reviewing businesses that had reported an amount on their tax return showing use of the preference. This review showed that these businesses had reported incorrectly.
• Reviewing Buyer Addendum data. There were no qualifying purchases, and some businesses incorrectly reported making such purchases.

In addition, JLARC staff:

• Contacted WSDOT Aviation to determine if any nonresident owners of large, private airplanes had filed documentation indicating the aircraft was exempt from registration. None had filed documentation.
• Contacted the Aerospace Futures Alliance, the lobbying organization that had promoted the legislation in 2013. JLARC staff received no information on whether the preference was being used.

However, after this report’s initial publication in July 2016 and after the Citizen Commission held two meetings in August and September seeking testimony, two companies contacted JLARC staff indicating they are conducting work that would qualify for this exemption.

At the time of that contact, the requirements to notify and provide documentation to WSDOT Aviation had not been met and the companies indicated they had not used the tax return reporting line specifically established for this preference. It is likely the work will qualify for this preference.

Measure Net Impact of the Preference on State Tax Revenues

As noted above, two companies contacted JLARC staff and indicated they are conducting the type of work covered by this preference. However, since there currently are no reported records of the extent of that work or the amount of related taxpayer savings, it is not yet possible for JLARC staff to measure the impact of the preference.

To what extent will continuation of the tax preference contribute to these public policy objectives?

As noted above, subsequent to this report’s initial publication, two firms contacted JLARC staff. The firms indicate they are conducting work that likely qualifies for this preference but have not yet reported their activity to the Department of Revenue. Therefore, at this time it is not possible for JLARC staff to determine the extent to which continuation will meet the preference’s public policy objectives.

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

There are no formal records of the use of this preference. However, after this report’s initial publication and after the Citizen Commission held two meetings seeking testimony, two companies contacted JLARC staff indicating they are conducting work that would qualify for this exemption. At the time the firms contacted JLARC staff, they had not used the tax return reporting line specifically established for this preference. However, it is likely they will have activity that qualifies for this preference.

As required in statute, the Department of Revenue added a specific reporting line for businesses selling large, private airplanes or repairing or modifying them to report their business income from such activities.

In examining tax return data, JLARC staff found reporting problems, which were confirmed by subsequent Department of Revenue examination and outreach.  Some businesses that had reported amounts on the line established for this preference had incorrectly reported. Excluding these errors, there were no other businesses that had officially reported using the tax preference.

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?

It is not yet possible for JLARC staff to estimate the impacts of this preference.

There are no formal records of the use of this preference. However, after this report’s initial publication and after the Citizen Commission held two meetings seeking testimony, two companies contacted JLARC staff indicating they are conducting work that would qualify for this exemption.

At the time the firms contacted JLARC staff, the firms had not used the tax return reporting line specifically established for this preference.

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?

It is not yet possible for JLARC staff to estimate the possible negative effects of termination.

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

When the Legislature considered this preference in 2013, industry representatives stated customers wanting private airplane modifications were inclined to go to other states that offered “more favorable tax exemption codes.” They noted the preference would provide a “level playing field” with other states.

JLARC staff examined states specifically identified in testimony as competitors for large, private airplane sales and modifications.  All of these states provide a sales tax exemption for large airplanes purchased by nonresidents, although several states require the airplane to leave the state within a set timeframe after purchase.  Kansas and Texas were specifically mentioned as being competitive for airplane modification work.

Intent Statement

ESSB 5882 (2013)

Sec. 1101. (1) The legislature intends to promote the economic development of our state’s aerospace cluster and increase the tax revenues collected by the state through promoting a competitive marketplace for storing and modifying unfurnished, noncommercial aircraft.  The legislature finds that Washington is currently losing these types of jobs to other states, resulting in the loss of high-wage jobs and new tax revenue.  Further, the legislature finds that the current tax statutes are an impediment to encouraging the development of aerospace clusters in our state.  Therefore, the legislature intends to modify our state’s tax policy to encourage aerospace cluster development within the state and increase tax revenues

(2) The joint legislative audit and review committed, as part of its tax preference review process, must estimate the net impact on state tax revenues by comparing the decrease in state revenues resulting from the changes made in part XI of this act to the additional tax revenues generated from the direct, indirect, and induced economic impacts from those changes.  The committee must also, to the extent practicable, estimate job growth in the aerospace cluster resulting from the changes made in part XI of this act.  The committee must conduct its tax preference review of part XI of this act during calendar year 2016 and report its findings and recommendations to the legislature by January 1, 2017.

RCW 82.08.215

Exemptions—Large private airplanes.  (Expires July 1, 2021.)

(1)(a) The tax levied by RCW 82.08.020 does not apply to:

(i) Sales of large private airplanes to nonresidents of this state; and

(ii) Sales of or charges made for labor and services rendered in respect to repairing, cleaning, altering, or improving large private airplanes owned by nonresidents of this state.

(b) The exemption provided by this section applies only when the large private airplane is not required to be registered with the department of transportation, or its successor, under chapter 47.68 RCW.  The airplane owner or lessee claiming an exemption under this section must provide the department, upon request, a copy of the written statement required under RCW 47.68.250(5)(c)(ii) documenting the airplane's registration exemption and any additional information the department may require.

(2) Sellers making tax-exempt sales under this section must obtain an exemption certificate from the buyer in a form and manner prescribed by the department.  The seller must retain a copy of the exemption certificate for the seller's files.  In lieu of an exemption certificate, a seller may capture the relevant data elements as allowed under the streamlined sales and use tax agreement.  For sellers who electronically file their taxes, the department must provide a separate tax reporting line for exemption amounts claimed under this section.

(3) Upon request, the department of transportation must provide to the department of revenue information needed by the department of revenue to verify eligibility under this section.

(4) For purposes of this section "large private airplane" means an airplane not used in interstate commerce, not owned or leased by a government entity, weighing more than forty-one thousand pounds, and assigned a category A, B, C, or D test flow management system aircraft weight class by the federal aviation administration's office of aviation policy and plans.

[2013 2nd sp.s. c 13 § 1103.]

RCW 82.12.215

Exemptions—Large private airplanes.  (Expires July 1, 2021.)

(1)(a) The tax levied by RCW 82.12.020 does not apply to the use of:

(i) Large private airplanes owned by nonresidents of this state; and

(ii) Labor and services rendered in respect to repairing, cleaning, altering, or improving large private airplanes owned by nonresidents of this state.

(b) The exemption provided by this section applies only when the large private airplane is not required to be registered with the department of transportation, or its successor, under chapter 47.68 RCW.  The airplane owner or lessee claiming an exemption under this section must provide the department, upon request, a copy of the written statement required under RCW 47.68.250(5)(c)(ii) documenting the airplane's registration exemption and any additional information the department may require.

(2) Upon request, the department of transportation must provide to the department of revenue information needed by the department of revenue to verify eligibility under this section.

(3) For purposes of this section, the conditions, limitation, and definitions in RCW 82.08.215 apply to this section.

[2013 2nd sp.s. c 13 § 1104.]

Legislative Auditor Recommendation: Review Prior to Expiration in 2021

Prior to its July 2021 expiration date, the JLARC staff should review this preference again to determine the extent of its use and economic impact. The Legislature will then have more complete information to help determine whether the preference is achieving the stated public policy objectives.

JLARC staff will monitor this preference to determine the extent of any qualifying activity. Because this preference is currently scheduled for review in 2019 as part of a broader analysis of aerospace preferences, the information gained from monitoring can be incorporated into the 2019 review.

Legislation Required: No.

Fiscal Impact: None known.

The Legislature should continue the preference.

While it appears the preference has not been used to date, it provides an opportunity for local companies to better compete on future bids for this type of work. The Commission believes the preference should continue at this time and defers a conclusion on the expiration date until it is reviewed again in 2019.

Joint Department of Revenue and Office of Financial Management Response