Legislative Auditor’s Conclusion:

While the preference clarifies place of sale of certain airplane parts, it appears to conflict with policy objectives by providing more advantageous tax treatment to out-of-state manufacturers of airplane parts than to in-state manufacturers.

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July 2019

With preference, sales of certain airplane parts whose final inspection takes place outside of Washington are exempt from B&O tax

The preference applies to certain airplane parts that are made by out-of-state manufacturers and sold to a Washington manufacturer of commercial airplanes. Sale of these parts is exempt from B&O tax if the place of sale ꟷ defined for the preference as the location of final testing or inspection ꟷ is outside Washington. A 2014 JLARC staff review of the preference includes additional detail.

The preference does not have an expiration date.

Estimated Biennial Beneficiary Savings

$620,000

Tax Type

Business & Occupation Tax

RCW 82.04.627

Applicable Statutes

2014 review concluded that the preference appeared to conflict with a public policy objective to reduce the cost of doing business in state

When the Legislature expanded aerospace preferences to in-state suppliers in 2008, it stated three broad public policy objectives:

  1. More comprehensively address the cost of doing business in Washington compared to other states.
  2. Encourage the continued presence of the aerospace industry for a broader group of suppliers.
  3. Provide well-paying jobs.

When reviewing this preference in 2014, JLARC staff also inferred a fourth objective – to clarify place of sale of certain airplane parts. The preference met this objective by defining place of sale. However, JLARC staff found that it appeared to conflict with the Legislature’s stated objective of reducing the cost of doing business in Washington as compared to other states. Specifically, the preference provided greater tax advantages to out-of-state airplane part manufacturers than to in-state manufacturers. A Washington commercial airplane manufacturer could still benefit indirectly to the extent that the out-of-state parts manufacturer chose to pass on its taxpayer savings to the buyer.

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Source: JLARC Analysis of RCW 82.04.627 and WAC 458-20-193.

In 2014 review, Legislative Auditor recommended reviewing and clarifying the preference

The Legislative Auditor recommended that the Legislature review and clarify the preferential tax treatment provided to out-of-state manufacturers and consider adding reporting or other accountability requirements to provide better information on use of this preference.

Limited data is available to analyze use of the tax preference for 2019 review

There is no specific reporting line for the preference, and out-of-state beneficiaries may not need to register with the Department of Revenue. For these reasons, it is difficult to determine the exact number of beneficiaries that claim the preference or the actual amount of tax savings.

However, based on the available data, JLARC staff identified three businesses that claimed the preference in fiscal years 2016 and 2017. Based on this data, estimated beneficiary savings are $620,000 per biennium. JLARC staff found fewer than three beneficiaries that claimed the preference in fiscal year 2018. Actual figures may be higher.

Legislative Auditor's conclusions and recommendations from 2014 remain applicable

The Legislature has made no substantive changes to the preference since the 2014 review.

  • One bill, enacted in 2015, updated Federal Aviation Regulation (FAR) citations and references in the statute governing the preference. The bill did not substantively change any of the provisions governing the preference.
  • Three other bills were proposed, but did not pass. Each would have made broad changes to all tax preferences, but included no substantive provisions specific to this preference.

As a result, the preference continues to provide greater tax advantages to out-of-state airplane part manufacturers than to in-state manufacturers.

Recommendations

Legislative Auditor's Recommendation: Review and Clarify

The Legislature should review and clarify the preferential tax treatment provided to out-of-state manufacturers because it seems to run counter to the Legislature’s stated policy objective of reducing the cost of doing business for Washington compared to locations in other states.

In addition, the Legislature may want to consider adding reporting or other accountability requirements that would provide better information on out-of-state manufacturers’ use of this preference.

More information is available on the Recommendations Tab.

Commissioners' Recommendation

Available October 2019.

Preliminary Report | Commercial Airplane Part Place of Sale

July 2019

Review Details

Applicable statutes

RCW 82.04.627

Exemptions - Commercial airplane parts.

(1) Except as provided in subsection (2) of this section, for purposes of the taxes imposed under this chapter on the sale of parts to the manufacturer of a commercial airplane, the sale is deemed to take place at the site of the final testing or inspection under federal aviation regulation part 21, subpart F or G.

(2) This section does not apply to:

(a) Sales of a standard part, such as a nut or bolt, manufactured in compliance with a government or established industry specification;

(b) Sales of a product produced under a technical standard order authorization or letter of technical standard order design approval pursuant to federal aviation regulation part 21, subpart O; or

(c) Sales of parts in respect to which final testing or inspection under federal aviation regulation part 21, subpart F or G takes place in this state.

(3) "Commercial airplane" has the same meaning given in RCW 82.32.550.

[ 2015 c 86 § 301; 2008 c 81 § 15.]

NOTES:

Findings—Savings—Effective date—2008 c 81: See notes following RCW 82.08.975.

Preliminary Report | Commercial Airplane Part Place of Sale

July 2019

Recommendations & ResponseS

Legislative Auditor's Recommendation

Legislative Auditor's Recommendation: Review and Clarify

The Legislature should review and clarify the preferential tax treatment provided to out-of-state manufacturers because it seems to run counter to the Legislature’s stated policy objective of reducing the cost of doing business for Washington compared to locations in other states.

In addition, the Legislature may want to consider adding reporting or other accountability requirements that would provide better information on out-of-state manufacturers’ use of this preference.

Legislation Required: Yes

Fiscal Impact: None

Preliminary Report | Commercial Airplane Part Place of Sale

July 2019

Recommendations & ResponseS

Letter from Commission Chair

Preliminary Report | Commercial Airplane Part Place of Sale

July 2019

Recommendations & Responses

Commissioners' Recommendation

Preliminary Report | Commercial Airplane Part Place of Sale

July 2019

Recommendations & Responses

Agency Response

If applicable, available December 2019.

Preliminary Report | Commercial Airplane Part Place of Sale

July 2019

More about this review

Study questions