|The Preference Provides||Tax Type||Estimated Biennial Beneficiary Savings|
A sales and use tax exemption for vessel deconstruction services when done at either a qualified vessel deconstruction facility or over the water in an area permitted under federal law.
The preference is scheduled to expire on January 1, 2025.
Sales and Use
|Public Policy Objective|
The Legislature stated the public policy objective was to decrease the number of abandoned and derelict vessels by providing incentives to increase vessel deconstruction.
Legislative Auditor’s Recommendation
The Legislature should review and clarify the preference because:
When reviewing the preference, the Legislature may want to consider:
Commissioner Recommendation: Available in October 2017.
The Legislature passed this preference to reduce the number of abandoned or derelict vessels in Washington by:
Public and private entities may act to remove abandoned or derelict vessels. Sometimes they must contract with a business to permanently dismantle the vessel (vessel deconstruction).
The entities do not pay sales and use tax on vessel deconstruction services if the work is done at either:
The Department of Natural Resources (DNR) is one of the largest buyers of these services in Washington. A DNR program can also reimburse other authorized public entities when they remove vessels.
“Vessel deconstruction” means permanently dismantling a vessel. Some abandoned or derelict vessels can be removed without deconstruction. The removal may still involve storing, towing, and transporting intact vessels.
Entities can claim the preference for vessel deconstruction when they:
Entities cannot claim the preference for other removal activities:
The tax preference became effective October 1, 2014, and is set to expire January 1, 2025.
Until 2002, Washington had no state-coordinated, comprehensive approach to the problem of abandoned or derelict vessels in Washington waters and shorelines.
The Legislature enacted the Derelict Vessel Removal Program (DVRP) in response to the growing number of vessels grounded or submerged on publicly or privately owned lands.
The DVRP gives funding and expertise to authorized public entities that remove and dispose of abandoned or derelict vessels. The entities are DNR, the Department of Fish and Wildlife, the Parks and Recreation Commission, metropolitan park districts, port districts, cities, and counties. DNR removes vessels from its lands and helps other authorized public entities upon request.
Annual recreational vessel registration fees funded DVRP. Until 2006, authorized public entities could receive up to 75 percent reimbursement for costs, depending on the account’s balance. In 2006, the reimbursement rate increased to 90 percent.
Based on proposed legislation from DNR, the Legislature addressed several issues regarding derelict vessel removal and funding. Among other things, the legislation:
DNR’s 2013-15 budget for the DVRP was $7 million. This total included a one-time $4.5 million appropriation to remove several large abandoned vessels that were threatening navigation and the environment.
The Legislature responded to suggestions from DNR and a stakeholder workgroup by enacting this sales and use tax exemption for vessel deconstruction services. The same bill set requirements for vessel owners:
The preference will expire January 1, 2025. The performance statement, which includes public policy objectives, expires six years earlier, on January 1, 2019.
The Department of Natural Resources (DNR) manages the Derelict Vessel Removal Program (DVRP). DVRP reimburses authorized entities for removing abandoned or derelict vessels. Costs can include vessel deconstruction. Statute provides key definitions, some of which are noted below.
DNR maintains an inventory of abandoned or derelict vessels that need removal. As of October 2016, the list included 172 vessels. DNR adds vessels to the list when they are reported as abandoned or derelict.
Statute directs DNR to prioritize vessels for removal. DNR assigns a priority level based on criteria including:
A vessel’s priority can change with the condition of the vessel or its environment.
|Priority 2||Non-emergency existing threats to human health, safety, and environment|
|Priority 3||Vessels impacting habitat and not already covered in a prior category|
|Priority 4||Minor navigation or economic impact|
|Priority 5||Other abandoned or derelict vessels|
|Priority 6||Vessels abandoned in boatyards|
The voluntary Vessel Turn-In Program (VTIP) allows DNR to dismantle and dispose of vessels that are at high risk for becoming abandoned or derelict, but do not yet meet the definition.
State law limits program funding to $200,000 per biennium. DNR prioritizes vessels for removal under this program separately from the DVRP list.
The DVRP budget of $2.46 million (2015-17 Biennium) comes from two accounts and is used to:
|Account||2015-17 Amount||Fund Source|
|Derelict Vessel Removal Account||
|Aquatic Lands Enhancement Account||
|Revenue from state-owned aquatic leases.|
DNR did not have funds to reimburse all authorized entities for vessel cleanup costs through the end of the 2015-17 Biennium.
DNR staff note that for vessels that require deconstruction work, approximately 50 percent of vessel removal costs are related to the vessel deconstruction.
The number of abandoned or derelict vessels removed by DNR has increased over time. But, the number of removals by other authorized public entities, as tracked by DNR, has decreased.
DNR notes there are many possible reasons that DVRP removals are increasing overall, but removals by other entities are decreasing. DNR identified several issues that could affect the removal numbers, including:
Vessel: Any type of watercraft or other mobile artificial contrivance, powered or not, intended to transport people or goods on water or for floating marine construction or repair. A vessel cannot be more than 200 feet long.
Abandoned vessel: A vessel that has been left, moored, or anchored in the same area without the express consent, or in violation of rules of, the owner or operator of the aquatic lands. The vessel must be left for 30 or more consecutive days or for more than 90 out of any 360 days to be considered abandoned. The vessel’s owner must be either not known, not locatable, or known and unwilling to take control of the vessel.
Aquatic lands: Tidelands, shorelands, harbor areas, and the beds of navigable waters, regardless of ownership.
Derelict vessel: A vessel that:
The vessel’s owner must be known and locatable, and exert control of the vessel.
Qualified vessel deconstruction facility: Structures, including those that float, permitted under section 402 of the federal Clean Water Act for vessel deconstruction.
The Legislature stated that it aimed to decrease abandoned or derelict vessels, and provided metrics for this review.
The Legislature categorized this preference as “intended to induce certain designated behaviors by taxpayers.” In its tax preference performance statement, the Legislature stated that the public policy objective was to:
. . . . decrease the number of abandoned and derelict vessels by providing incentives to increase vessel deconstruction in Washington. . . .This incentive will lower the costs associated with vessel deconstruction and encourage businesses to make investment in vessel deconstruction facilities.
The Legislature directed JLARC to review the preference by December 1, 2018, and provided the following metrics for evaluation. In short, if either an increase in capacity or a reduction in the average cost led to more derelict vessels being removed from Washington waters, then the Legislative Auditor should recommend extending the preference.
While the tax preference does not expire until January 1, 2025, the performance statement identifying the objectives and metrics expires six years earlier, on January 1, 2019.
|If Either…||Resulted in…||Then:|
|An increase in available capacity to deconstruct derelict vessels
A reduction in the average cost to deconstruct vessels
|An increase in the number of derelict
vessels removed from Washington waters
(compared to before June 12, 2014)
|The Legislative Auditor should recommend extending the January 1, 2025, expiration date|
The Legislature stated that the public policy objective was to decrease the number of abandoned and derelict vessels by removing them from Washington’s waters. It intended to do so by lowering the cost of deconstruction activities and encouraging businesses to invest in deconstruction facilities.
Department of Natural Resources (DNR) data shows that:
However, it is unclear whether the preference caused the increase:
JLARC staff were unable to obtain records on how many vessels were removed or deconstructed outside of the DVRP.
Removals have increased slightly, but there is no evidence that the preference has increased capacity for vessel deconstruction work in Washington. Not all removals involve deconstruction. JLARC staff interviewed DNR staff, and representatives of two large businesses that deconstruct vessels and a small boatyard. They all noted:
The preference decreases costs to deconstruct vessels by the applicable sales tax rate for where the work is performed (9.0 percent on average). It is unclear if the cost reduction caused or contributed to the slight increase in vessel removals.
DNR representatives stated that the sales tax savings was intended to increase the amount of removal and deconstruction work the agency could complete within DVRP budget limits.
JLARC staff identified factors that, along with the lowered costs for deconstruction, may have contributed to the increase in vessel removals.
Public funds available for removal: In the 2013-15 Biennium, the DVRP received a one-time $4.5 million appropriation to remove several large vessels.
Cost of removal: If costs are lower, more vessels can be removed within DVRP funding limits.
Size and condition of the vessel: DVRP records from the 2015-17 Biennium indicate that the removal cost varies by vessel size.
|2015-17 Biennium (through July 2016)||Vessels Under 35 ft||Vessels 35 – 65 ft||Vessels Over 65 ft|
|Average Removal Cost||
DNR and industry sources note that commercial and submerged vessels are complicated and expensive to remove. For example, businesses must use a lift to remove vessels over 35 feet long from the water. Currently, there are no lifts on Washington’s outer Pacific Coast. Removing large derelict vessels located far from lifts increases removal costs.
The preference is scheduled to expire on July 1, 2025.
Continuing the preference:
Tax preferences have direct beneficiaries (entities whose state tax liabilities are directly affected) and may have indirect beneficiaries (entities that may receive benefits from the preference, but are not the primary recipient of the benefit).
Direct beneficiaries of the tax preference are authorized public entities, private organizations (e.g., businesses, marinas), or individuals that use a qualified vessel deconstruction service to dismantle and remove a vessel. Direct beneficiaries do not pay sales or use tax on deconstruction services. Absent the preference, they would pay sales tax of 9.0 percent on average. Authorized public entities include:
Industry representatives stated that most deconstruction work is contracted by DNR or other authorized public entities (estimated at 95 percent). DNR appears to be the largest beneficiary.
Indirect beneficiaries of the preference are businesses that deconstruct vessels. They may see an increase in vessel deconstruction work directed to them because of the preference.
JLARC staff estimate a minimum direct beneficiary savings of $42,000 in Fiscal Year 2016 and $246,000 for the 2017-19 Biennium. This estimate is likely low, as other vessel deconstruction work that is not paid for through the DVRP program is not included in this estimate. The preference is currently scheduled to expire January 1, 2025.
|Biennium||Fiscal Year||Qualifying Deconstruction
Work (per DNR)
(beginning Oct. 1, 2014)
Estimated Biennial Savings
If the tax preference were terminated or allowed to expire as scheduled, the authorized public entities and others that purchase vessel deconstruction work would pay sales or use tax on the deconstruction work as they did before October 1, 2014.
It is unlikely that termination or expiration of the preference would impact employment or the economy because there is no evidence that this preference has resulted in an increase in vessel deconstruction capacity.
JLARC staff reviewed statutes for 29 states that border a coast, the Great Lakes, or other waterway.
Most of these 29 states have a formal process to deal with abandoned or derelict vessels. Many require that owners (if known) be responsible for removal and disposal costs. None appears to have a sales and use tax exemption for vessel deconstruction. JLARC staff identified six states with a dedicated funding source for removal efforts.
(1) The tax levied by RCW 82.08.020 does not apply to sales of vessel deconstruction performed at:
(a) A qualified vessel deconstruction facility; or
(b) An area over water that has been permitted under section 402 of the clean water act of 1972 (33 U.S.C. Sec. 1342) for vessel deconstruction.
(2) The definitions in this subsection apply throughout this section unless the context clearly requires otherwise.
(a)(i) "Vessel deconstruction" means permanently dismantling a vessel, including: Abatement and removal of hazardous materials; the removal of mechanical, hydraulic, or electronic components or other vessel machinery and equipment; and either the cutting apart or disposal, or both, of vessel infrastructure. For the purposes of this subsection, "hazardous materials" includes fuel, lead, asbestos, polychlorinated biphenyls, and oils.
(ii) "Vessel deconstruction" does not include vessel modification or repair.
(b) "Qualified vessel deconstruction facility" means structures, including floating structures, that are permitted under section 402 of the clean water act of 1972 (33 U.S.C. Sec. 1342) for vessel deconstruction.
(3) Sellers making tax-exempt sales under this section must obtain from the purchaser an exemption certificate in a form and manner prescribed by the department. The seller must retain a copy of the 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.
[ 2014 c 195 § 301.]
Reviser's note: Section 301, chapter 195, Laws of 2014 expires January 1, 2025, pursuant to the automatic expiration date established in RCW 82.32.805(1)(a).
Effective date—2014 c 195 §§ 301 and 302: "Sections 301 and 302 of this act take effect October 1, 2014." [ 2014 c 195 § 304.]
Intent—2014 c 195 §§ 301 and 302: "(1) This section is the tax preference performance statement for the tax preference contained in sections 301 and 302 of this act. This performance statement is only intended to be used for subsequent evaluation of this tax preference. It is not intended to create a private right of action by any party or be used to determine eligibility for preferential tax treatment.
(2) The legislature categorizes this tax preference as intended to induce certain designated behavior by taxpayers as indicated in RCW 82.32.808(2)(a).
(3) It is the legislature's specific public policy objective to decrease the number of abandoned and derelict vessels by providing incentives to increase vessel deconstruction in Washington by lowering the cost of deconstruction. It is the legislature's intent to provide businesses engaged in vessel deconstruction a sales and use tax exemption for sales of vessel deconstruction. This incentive will lower the costs associated with vessel deconstruction and encourage businesses to make investments in vessel deconstruction facilities. Pursuant to chapter 43.136 RCW, the joint legislative audit and review committee must review the sales tax exemptions provided under sections 301 and 302 of this act by December 1, 2018.
(4) If a review finds that the increase in available capacity to deconstruct derelict vessels or a reduction in the average cost to deconstruct vessels has resulted in an increase of the number of derelict vessels removed from Washington's waters as compared to before June 12, 2014, then the legislature intends for the legislative auditor to recommend extending the expiration date of the tax preference.
(5) In order to obtain the data necessary to perform the review in subsection (3) of this section, the joint legislative audit and review committee should refer to data kept and maintained by the department of natural resources.
(6) This section expires January 1, 2019." [ 2014 c 195 § 303.]
Findings—Intent—2014 c 195: See notes following RCW 79.100.170 and 79.100.180.
(1) This chapter does not apply to the use of vessel deconstruction services performed at:
(a) A qualified vessel deconstruction facility; or
(b) An area over water that has been permitted under section 402 of the federal clean water act of 1972 (33 U.S.C. Sec. 1342) for vessel deconstruction.
(2) The definitions in RCW 82.08.9996(2) apply to this section.
[ 2014 c 195 § 302.]
When it enacted this preference, the Legislature directed the Legislative Auditor to recommend extending the expiration date if either:
resulted in an increase in the number of derelict vessels removed compared to before June 12, 2014.
Based on this directive, the Legislature should review and clarify this tax preference because:
When reviewing the preference, the Legislature may want to consider one of the following two options:
Legislation required: Yes (preference expires January 1, 2025. The performance statement expires six years earlier, on January 1, 2019).
Fiscal impact: Depends on legislative action.
Available December 2017.
Available December 2017.
If applicable, will be available December 2017.