2024 Tax Preference Review:
Aerospace
PRELIMINARY REPORT | JULY 2024
Pete van Moorsel, Dana Lynn, Research
Analysts
Stephanie Hoffman, Deputy Legislative Auditor; Eric Thomas, Legislative
Auditor
Legislative Auditor's conclusion
The preferences continue to meet legislative goals to lower costs, maintain the industry's presence, and encourage strong wages. Employment has decreased since 2019, and it remains unclear if job growth meets expectations.
Key points
| Earlier JLARC reviews
The 2013 Legislature directed JLARC to review the aerospace tax preferences every five years. JLARC previously reviewed the preferences in 2014 and 2019. These reports are available at the following links: |
- The Legislature enacted nine tax preferences that benefit the aerospace industry. It repealed one preferential tax rate to comply with a World Trade Organization ruling.
- The preferences lower costs and improve competitiveness by reducing the industry's effective tax rate. However, the reduction is smaller than it was in 2019.
- Washington's aerospace industry is still among the largest in the country and pays wages that are above industry and statewide averages.
- Aerospace industry employment has declined since 2019. It is above 2003 levels, so it continues to be unclear if employment levels meet legislative expectations.
- Legislative Auditor recommends the Legislature clarify the employment objective and consider reviewing the preferences every 10 years, rather than the current five-year cycle.
About these preferences
| Estimated savings: $205.4 million (CY 2028-29) | Tax type: Multiple taxes |
| Expiration date: July 1, 2040 | Applicable statute(s): Multiple |
Executive summary
Between 2003 and 2020, the Legislature created nine tax preferences that benefit Washington's aerospace industry. The aerospace tax preferences include:
- 3 preferential business and occupation (B&O) tax rates.
- 2 B&O tax credits.
- 2 sales and use tax exemptions.
- 1 property tax exemption.
- 1 leasehold excise tax exemption.
Currently, businesses can claim eight of nine preferences. The 2020 Legislature repealed one preferential tax rate to comply with a World Trade Organization ruling.
Preferences continue to meet three of four legislative objectives
This is consistent with the Joint Legislative Audit and Review Committee (JLARC) reviews in 2014 and 2019.
| Objective | Results | ||
|---|---|---|---|
2014 review |
2019 review |
2024 review |
|
| Reduce the cost of doing business in Washington for the aerospace industry compared to other states | Met |
Met |
Met |
| Encourage the continued presence of the aerospace industry | Met |
Met |
Met |
| Provide jobs with good wages and benefits | Met |
Met |
Met |
| Maintain and grow Washington's aerospace industry workforce | Unclear |
Unclear |
Unclear |
Preferences reduce costs for beneficiaries
JLARC's 2019 report found that the preferences lower costs for Washington aerospace businesses through tax savings and a lower effective tax rate.
The current review finds that the preferences still reduce costs, but the impact is lower than in the 2019 JLARC review. The changes are due in large part to the 2020 repeal of one preference.
- Beneficiaries currently save about $100 million per year. However, between 2018 and 2022, savings declined from $261 million to $95 million. At the same time, the number of businesses claiming preferences fell by 62%.
- The available tax preferences reduce effective tax rates for aerospace manufacturers. However, the reduction in the tax rate is now smaller. For example, in 2019, the preferences reduced the rate for a hypothetical large business from 21% to 10%. In 2024, they reduced it from 21% to 13%.
Figure 1: Preferences now have less impact on the effective tax rate for a hypothetical large business
Note: In this analysis, a large business means one with 10,000 employees.
Source: JLARC staff analysis of 2019 EY estimates for a hypothetical large business
Washington's aerospace industry is still among the largest in the country and pays good wages
JLARC's 2019 report found that aerospace continued to be a major industry in Washington, noting factors such as its contribution to the nation's gross domestic product (GDP), size of the workforce, and Boeing airplane deliveries.
This review finds that despite declines, the industry remains strong in Washington.
- In 2022, Washington's aerospace and other transportation equipment manufacturing industries contributed $27.4 billion to the nation's GDP. This is more than any other state for this industry category.
- In 2022, the industry's 234 Washington business establishments employed 73,852 workers. This is 14.3% of the national aerospace industry total. Washington has the second-largest industry workforce behind California. The average wage for Washington's aerospace workforce is about $128,000, higher than the aerospace industry in general or Washington's statewide average.
- Boeing delivered 528 airplanes in 2023. While this is lower than its peak in 2018, it marks a recovery since its recent low in 2020.
Aerospace industry employment has declined since JLARC's 2019 review. It's unclear whether it meets legislative expectations.
Aerospace industry employment has risen and fallen over the last two decades. In 2022, there were:
- 19% more jobs than in 2003.
- 22% fewer jobs than in 2013, the year the preferences were extended and expanded.
- 14% fewer jobs than in 2018, the last year covered in our previous review.
Boeing reported an employment increase in 2023 but industry figures are not yet available for the same period.
While the Legislature stated that the preferences should maintain and grow the workforce, it has not set a target or measure. Compared to 2003, the workforce has grown. Compared to 2013 and other years, it has not. As noted in earlier reports, JLARC staff cannot conclude whether the preferences meet this objective without a measurable target from the Legislature.
Figure 2: Jobs remain above 2003 levels but below levels noted in previous JLARC reviews
Source: JLARC analysis of aerospace employment in Washington and at Boeing
Legislative Auditor's recommendations
- The Legislature should clarify its expectations for the level of aerospace industry employment.
- The Legislature should consider eliminating the requirement that JLARC review these preferences every five years. The preferences would then revert to the standard 10-year review cycle for tax preferences.
You can find additional information in the Recommendations section.
Commissioner's Recommendation
Available on Citizen Commission website October 2024.
Part 1.
Aerospace tax preferences
Between 2003 and 2020, the Legislature enacted nine tax preferences that benefit the aerospace industry. Appendix A details the legislative action.
The preferences include a variety of preferential tax rates, credits, and exemptions. They are scheduled to expire July 1, 2040. Appendix B offers more information about each preference.
| Preference type | Preference | Learn more |
|---|---|---|
| Preferential B&O tax rates | Commercial airplane manufacturing, retailing, and wholesaling, including parts & tooling | RCW 82.04.260(11) |
Link |
Aerospace product development | RCW 82.04.290(3) |
Link | |
Certified aircraft repair firms | RCW 82.04.250(3) |
Link | |
| B&O tax credits | Aerospace product development expenditures | RCW 82.04.4461 |
Link |
Commercial airplane manufacturing – property/leasehold excise taxes paid | RCW 82.04.4463 |
Link | |
| Sales and use tax exemptions | Aerospace product development computer expenditures | RCW 82.08.975 & 82.12.975 |
Link |
Commercial airplane development facilities | RCW 82.08.980 & 82.12.980 |
Link | |
| Leasehold excise tax exemption* | Superefficient airplane production facilities | RCW 82.29A.137 |
Link |
| Property tax exemption* | Superefficient airplane production facilities | RCW 84.36.655 |
Link |
*The two preferences for superefficient airplane production have never been claimed
Preferences are available to businesses in aerospace and related industries
A business may claim one or more preferences. To claim a preference, the business must perform certain aerospace-related activities such as:
- Earning income from developing aerospace products.
- Buying certain computer equipment.
- Repairing aircraft.
- Building commercial airline production facilities.
Businesses in the aerospace industry are the preferences' primary beneficiaries. Firms in related industries also claim the preferences.
- Aerospace industry includes businesses that file taxes under North American Industry Classification System (NAICS) code 3364--Aerospace Product and Parts Manufacturing. Boeing is the largest aerospace business in Washington and the state's largest private employer.
- Related industries include architectural and engineering services, durable goods wholesaling, and fabricated metal product manufacturing.
Preferences share the same four objectives
The Legislature established three objectives when enacting the preferences in 2003. The fourth objective was added in 2013 when the expiration date for the preferences was extended.
- Reduce the cost of doing business in Washington for the aerospace industry compared with other states.
- Encourage the continued presence of the aerospace industry in Washington.
- Provide jobs with good wages and benefits.
- Maintain and grow Washington's aerospace industry workforce.
Legislature repealed the preferential B&O tax rate for manufacturing commercial airplanes in 2020
In April 2019, the World Trade Organization (WTO) ruled that Washington's preferential B&O tax rate for commercial airplane manufacturers violated WTO rules.
In April 2020, the Legislature responded by repealing the preferential B&O tax rate (0.2904%) for manufacturers of commercial airplanes.
Legislature set a new rate, subject to three conditions that have not been met
The Legislature created a new preferential B&O tax rate (0.357%) for these activities. This new rate is higher than the one repealed but still lower than the regular rate (0.484%).
The new rate will take effect only if three conditions are met:
- The United States and European Union reach an agreement that resolves their WTO disputes about large civil airplanes and expressly allows preferential tax rates.
- Not met.
- The Department of Commerce (Commerce) notifies the Department of Revenue (DOR) in writing that such an agreement has been reached and includes a copy of the notice to Commerce from the U.S. Trade Representative about the agreement.
- Not met.
- The Department of Labor and Industries (L&I) notifies DOR that a significant commercial airplane manufacturer has at least a 0.3% aerospace apprenticeship utilization rate of its qualified apprenticeable workforce.
- Met. A January 2024 L&I report notes that a significant airplane manufacturer has an apprenticeship utilization rate of 2.3% as of September 2023. L&I has not officially notified DOR.
Part 2.
Savings
Beneficiaries currently save about $100 million per year. Savings declined 63% from 2018 to 2022.
In calendar years 2018 through 2022, beneficiaries saved $780.4 million by claiming the preferences. The two preferences for superefficient airplane production have never been claimed.
However, total beneficiary savings declined from $261 million (2018) to $95 million (2022). This is a $166 million (63%) decline.
- The repeal of the commercial airplane manufacturing preferential B&O tax rate explains $116 million of the difference.
- The remaining $50 million is attributable to declines in savings for other preferences.
JLARC staff estimated savings for 2023 through 2029. The estimated total savings for the two-year period 2028 and 2029 is $205 million. The estimates assume that:
- Beneficiaries will continue to use six preferences.
- Beneficiaries will not claim the two preferences for superefficient airplane production.
- The preferential rate for manufacturing commercial airplanes will not take effect.
Beneficiary savings for each preference are in Appendix B.
Figure 3: Beneficiaries saved more than $780 million from 2018-2022. Savings dropped $166 million (63%) from 2018 to 2022.
2018-19 |
2020-21 |
2022-23 (est) |
2024-25 (est) |
2026-27 (est) |
2028-29 (est) |
|---|---|---|---|---|---|
$463.3M |
$221.8M |
$198.1M |
$205.4M |
$205.4M |
$205.4M |
Note: Estimated future annual use based on JLARC calculation of average historical preference use (See Appendix B for details).
Source: JLARC staff analysis of DOR tax return data, 2018-2022
Fewer businesses are claiming the preferences
The number of distinct businesses claiming the preferences has declined since 2018.
- In 2018, 545 distinct businesses claimed one or more of the aerospace tax preferences.
- In 2022, the count was 209, a drop of 336 businesses (62%).
The change appears due in large part to the repeal of the commercial airplane manufacturing preference. In the years before repeal, at least 360 businesses claimed the preference each year. Because each business can claim more than one preference, some of these businesses may still benefit from one or more of the remaining preferences.
Figure 4: The number of distinct businesses using the preferences declined by 62% from 2018- 2022, largely due to the repeal of one preference
Source: JLARC staff analysis DOR tax return data, 2018 through 2022
The preferences continue to reduce the effective tax rate, but the effect is less than in 2019
|
Effective Tax Rate
Effective tax rate (ETR) analysis estimates what a hypothetical firm might owe in business taxes. It expresses the impact of these taxes as a reduction in the business's rate of return over time. Performing this analysis with and without available tax preferences and other incentives can illustrate the impact of incentives. The analysis allows a comparison of what an identical business might pay in taxes if it were in different states. |
As part of its 2019 review, JLARC staff hired EY (Ernst & Young) to evaluate the business tax climate for the aerospace industry across Washington and 13 other comparison states.
- The 13 comparison states included those with a significant aerospace presence, such as California, Missouri, and North Carolina.
- EY developed two hypothetical businesses: one with more than 10,000 employees and one with 50 employees. These reflected the makeup of Washington beneficiaries.
- For the study, the effective tax rate considered all state and local taxes a hypothetical aerospace business might pay. This included sales and use taxes, property taxes, and an income or B&O tax, as applicable for all 14 states.
EY's 2019 analysis found that Washington's aerospace tax preferences lowered the cost of doing business in Washington compared with the 13 other states and improved competitiveness.
2024 JLARC staff update
For the 2024 review, JLARC staff updated the data for Washington so that it reflects the impact of repealing the commercial airplane manufacturing preference. JLARC staff did not adjust the effective tax rates for other comparison states.
The analysis found that the remaining preferences still reduce the effective tax rates for both large and small hypothetical aerospace businesses. However, the effect is less than in 2019.
- For a hypothetical large firm (10,000 employees): In 2019, the preferences reduced the effective tax rate by 52%. In 2024, it reduced the rate by 38% (Figure 5).
- For a hypothetical small firm (50 employees): In 2019, the preferences reduced the effective tax rate by 61%. In 2024, it reduced the rate by 53% (Figure 6).
Figure 5: Preferences have less impact on the effective tax rate for a hypothetical large firm in 2024 compared to 2019
Source: JLARC staff analysis of 2019 EY estimates for a hypothetical large firm with 10,000 employees
Figure 6: Preferences have less impact on the effective tax rate for a hypothetical small firm in 2024 compared to 2019
Source: JLARC staff analysis of 2019 EY estimates for a hypothetical small firm with 50 employees
Part 3.
WA aerospace industry
Washington's aerospace industry contributes more to national GDP than any other state
JLARC staff used Bureau of Economic Analysis (BEA) data to determine how much Washington's aerospace industry contributes to the nation's gross domestic product (GDP). GDP is the total market value of the final goods and services produced within the United States each year.
- BEA reports GDP by aggregating multiple transportation equipment manufacturing industries under the Other Transportation Equipment Manufacturing classification.
- This classification includes aerospace and three other industry groups related to manufacturing railroad rolling stock, ships and boats, and other transportation equipment. It does not include motor vehicle manufacturing.
Nationally, the Other Transportation Equipment Manufacturing industry classification contributed $173 billion to the gross domestic product in 2022.
- Washington's contribution – $27.4 billion – was 16% of the national total. This is more than the contribution from the industry in any other state.
- The value and the share of Washington's contribution to GDP is lower than in 2018 when Washington contributed $36.9 billion (23.2%) of the national total ($159.4 billion).
Figure 7: State contribution to GDP, Other Transportation Equipment Manufacturing, 2022
Source: JLARC staff analysis of BEA GDP by State data
Boeing airplane deliveries declined and began to recover after 2018 peak
Boeing's airplane deliveries reached a record of 806 in 2018. Deliveries declined sharply in 2019 and 2020. They began to recover in 2021. In 2023, deliveries exceeded 500 for the first time since 2018. It assembled most of the airplanes in Washington.
Boeing told JLARC staff that the decline is due in part to the 737 MAX grounding (March 2019-November 2020) and the COVID pandemic.
Between 2020 and 2021, Boeing consolidated its 787 production in South Carolina, ending its assembly of these airplanes in Everett. The delivery data below includes the 787 model.
The company told JLARC staff it expects airplane deliveries to continue recovering.
- Boeing reported plans to set up a fourth 737 assembly line in Washington, the first 737 assembly at the Everett facility. It expects the assembly line to increase its 737-assembly rate from 31 per month in 2023 to 50 per month by 2025 or 2026.
- Boeing reports its order backlog in December 2023 was 5,626 airplanes. The company estimates that this backlog represents seven years of airplane production.
Figure 8: Boeing airplane deliveries, 2003-2023
Source: Boeing public airplane delivery data
The number of Washington aerospace establishments has grown
|
Business establishments
JLARC staff reviewed establishment-level data from the Bureau of Labor Statistics (BLS) to compare Washington's aerospace industry to other states. A business establishment is one physical location. Most businesses have only one establishment, but they can have more. |
In 2022, Washington had 234 aerospace business establishments, an increase from 198 in 2018. Only three states (California, Florida, and Texas) have more aerospace business establishments.
From 2018 to 2022, Washington's location quotient for aerospace business establishments increased from 2.42. to 2.83. Washington's location quotient for aerospace establishments is third highest in the nation, behind Kansas and Connecticut.
- Location quotient is a way to measure a state's share of an industry compared to a larger region such as the nation. Location quotients can help illustrate a state's relative concentration of measures such as business establishments or employment.
- A location quotient of 1 means the industry has the same share as the nation. A location quotient greater than 1 indicates a greater share than the nation.
Part 4.
Jobs and wages
Washington is the nation's second largest aerospace industry employer
The aerospace industry employed 73,852 workers in 2022. This is 14.3% of the national industry total, making Washington the second largest industry employer. California is first with 79,727 industry employees (15.5% of the national total).
However, Washington's aerospace industry represents a larger share of total state employment than any other state. Washington's location quotient for aerospace employment was 6.1 in 2022. While it has fallen from 7.2 in 2018, it remains the largest of any state, ahead of second-place Kansas, at 6.0.
Unclear whether industry employment meets legislative expectations
One of the Legislature's objectives is to maintain and grow Washington's aerospace industry workforce. The Legislature has not set a measurable performance metric to evaluate maintenance or growth.
Aerospace industry employment has risen and fallen since the Legislature enacted the preferences in 2003. Employment in 2022 was:
- 11,600 jobs (19%) higher than in 2003.
- 20,900 jobs (22%) lower than in 2013, when the Legislature extended the preferences.
- 12,100 jobs (14%) lower than in 2018, which is the last year included in JLARC's previous review.
Boeing's Washington employment has followed similar trends. In December 2023, Boeing publicly reported that it employed 66,797 people. This is an 11% increase from the prior year and 4% decrease from 2018.
Industry-level data for 2023 was not available at the time this report was produced. However, because Boeing represents the majority of Washington's aerospace industry employment, JLARC staff expect that it is likely industry employment data for 2023 will show a similar increase.
Figure 9: 2022 aerospace industry employment is above 2003 levels but below 2013 levels
Source: JLARC analysis of WA statewide and Boeing employment
Washington's aerospace workforce has become more diverse. Its composition differs from the broader manufacturing industry and statewide workforce.
Since 2003, the aerospace workforce has become more diverse.
- The share of Asian, Black, Hispanic, or multiracial employees increased from 2003 to 2022.
- The share of workers identifying as white alone decreased by 20 percentage points.
Figure 10: The share of Asian, Black, Hispanic, or multiracial employees has increased in the aerospace industry since 2003
|
2003 | 2022 | Direction |
|---|---|---|---|
| American Indian or Alaska Native | 0.5% | 0.4% | ▼ |
| Asian | 7.7% | 19.9% | ▲ |
| Black or African American | 3.0% | 4.4% | ▲ |
| Hispanic or Latino of Any Race | 2.6% | 7.3% | ▲ |
| Native Hawaiian or Other Pacific Islander | 0.2% | 0.5% | ▲ |
| Two or More Race Groups | 1.7% | 3.1% | ▲ |
| White | 84.2% | 64.4% | ▼ |
Note: To illustrate the race and ethnicity of the aerospace industry workforce, JLARC staff referred to data from the U.S. Census' Local Employer-Household Dynamics (LEHD) program. Its Quarterly Workforce Indicators (QWI) include local labor market statistics by worker demographics.
Source: JLARC staff analysis of LEHD data
Compared to both the manufacturing industry and the statewide workforce, the 2022 aerospace industry workforce has:
- A higher proportion of Asian employees.
- A lower proportion of Hispanic or Latino employees.
- Similar proportions of employees from all other races or ethnicities.
Figure 11: The racial and ethnic characteristics of the aerospace workforce in WA is somewhat different than manufacturing and the statewide workforce
Source: JLARC staff analysis of LEHD Data
Race and ethnicity data on annual tax performance reports was insufficient for analysis
Statute requires Aerospace tax preference beneficiaries to file an annual tax performance report. The report includes optional questions about the race and ethnicity of their employees.
For 2022, 179 beneficiaries completed a report.
- 71 answered questions about their employees' race and 108 declined or left answers blank. Those who answered noted that they did not know the race of 68% of their employees.
- 70 answered the questions about employees' ethnicity and 109 declined or left answers blank. Those who answered reported that they did not know the ethnicity of 72% of their employees.
- Due to the limitations of these responses, JLARC staff instead reported the industrywide estimates from the U.S. Census, as described above.
Aerospace industry pays above-average wages
Since the previous JLARC review, the average wage paid to Washington employees of aerospace businesses grew 7% to $127,875.
- It is higher than the average for the aerospace industry in general or Washington statewide average.
- It is the fourth highest in the nation, behind Colorado, Massachusetts, and Connecticut.
From 2018 to 2022:
- The average wage of all Washington industries grew 28% to $85,228.
- The average wage for all Washington manufacturers grew 11% to $88,449.
- The national average aerospace industry wage grew 9% to $113,844.
Figure 12: Average wages in Washington's aerospace industry exceed those in comparable industries
Note: The Quarterly Census of Employment and Wages (QCEW) program publishes a quarterly count of employment and wages reported by employers covering more than 95 percent of U.S. jobs
Source: JLARC staff analysis of BLS QCEW data
Beneficiaries of the aerospace tax preferences must submit employment and wage data to DOR on annual tax performance reports. In 2022, 179 businesses claiming one or more of the aerospace tax preferences gave data on wages.
Their responses indicate that:
- 45% of employees earned wages between $63,000 and $104,000 per year.
- 40% of employees earned wages greater than $104,000 per year.
Figure 13: 85% of employees earned wages greater than $63,000 per year
Annual wages |
Under $31K |
$31-42K |
$42-53K |
$52-63K |
$63K-$104K |
More than $104K |
|---|---|---|---|---|---|---|
Percent of employees |
0% |
3% |
6% |
6% |
45% |
40% |
Note: The annual report includes hourly wages in certain wage bands. JLARC staff converted them to annual wages by multiplying by 2,088
Source: JLARC staff analysis of DOR annual tax performance report data
Recommendations
- The Legislature should clarify its expectations for the level of aerospace industry employment.
- Providing additional detail in the tax preference performance statement, such as a baseline level of employment, would provide the Legislature with more useful information in the next review. This is consistent with the Legislative Auditor's recommendations in 2014 and 2019.
- The Legislature should consider eliminating the requirement that JLARC review these preferences every 5 years. The preferences would then revert to the standard 10-year review cycle for tax preferences.
Legislation Required: Yes.
Fiscal Impact: None.
Implementation Date: Depends on legislative action.
Letter from Commission Chair
Available on Citizen Commission website October 2024.
Commissioners' Recommendation
Available on Citizen Commission website October 2024.
Current Recommendation Status
JLARC staff follow up on the status of Legislative Auditor recommendations to agencies and the Legislature for four years. The most recent responses from agencies and status of the recommendations in this report can be viewed on our Legislative Auditor Recommendations page.
Appendices
Appendix A: Legislative action on aerospace preferences | Appendix B: Tax preference details | Appendix C: Applicable statutes | Appendix D: Study questions & methods | Appendix E: Audit authority | Appendix F: Study process
Appendix A: Legislative action on aerospace preferences
The Legislature initially enacted a set of tax preferences directed to the aerospace industry in 2003. Over the years, the Legislature has extended and expanded the preferences.
- 2003: The original set of preferences benefited manufacturers or processors for hire of commercial airplanes and their components, as well as retailing and wholesaling activities of the manufacturer. The Legislature set a July 1, 2024, expiration date for the preferences.
- 2008: The Legislature expanded the pool of beneficiaries to include non-manufacturers that research, design, or engineer aerospace products for others to manufacture.
- 2008: The Legislature expanded the pool of beneficiaries to include manufacturers that supplied aerospace tooling and businesses that provide services at federally certified aviation repair stations.
- 2013: The Legislature extended the expiration date for the aerospace preferences from July 1, 2024, to July 1, 2040. The extension was contingent on a significant commercial airplane manufacturing program being sited in Washington by June 30, 2017. That contingency was met.
- 2020: The Legislature last changed the preferences in 2020 to comply with a World Trade Organization (WTO) ruling that Washington's preferential B&O tax rate for commercial airplane manufacturing violated WTO rules. The preferential rate for commercial airplane manufacturing was repealed. The Legislature established a set of three conditions that must be met after March 31, 2021. If they are met, a higher, but still preferential, rate of 0.357 percent will apply to commercial airplane manufacturing activities. This rate is not currently available.
Appendix B: Tax preference details
The nine tax preferences include preferential tax rates, credits, and exemptions. They affect four tax programs: the business and occupation (B&O) tax, the sales and use tax, the property tax, and the leasehold excise tax. This appendix provides additional detail about each preference's public policy objectives, statutory provisions, and the estimated beneficiary savings.
The preferences share common definitions
Statute defines a "commercial airplane" as an airplane certified by the Federal Aviation Administration for transporting persons or property, and any military derivative of a commercial airplane. Private airplanes, helicopters, and military fighter aircraft do not qualify for the preferences.
Qualifying components must be federally certified for installation or assembly into a commercial airplane.
The statute defines a "superefficient airplane" as a twin aisle airplane that uses 15% to 20% less fuel than similar airplanes on the market. The statute also includes specifications that uniquely describe Boeing's 787 line of commercial airplanes.
Statute defines "aerospace products" as:
- Commercial airplanes and their components.
- Machinery and equipment designed and used primarily for the maintenance, repair, overhaul, or refurbishing of commercial airplanes or their components by federally certified aviation repair stations.
- Tooling specifically designed for use in manufacturing commercial airplanes or their components.
Generally, the preferences that apply to airplane manufacturers also apply to "processors for hire." A processor for hire is a business that manufactures products from materials owned by another business.
The preferences share a common expiration date
The aerospace preferences are scheduled to expire on July 1, 2040.
Most of the preferences were enacted in the same legislation in 2003, contingent on the location of a facility for assembling a superefficient airplane in Washington. On December 19, 2003, Governor Locke signed an agreement with The Boeing Company to build the 787 airplane in Everett, which met the conditions for the preferences to become effective. The certified aircraft repair firms preferential B&O tax rate was also enacted in 2003, through different legislation.
In 2013, the Legislature extended the expiration dates for the preferences from July 1, 2024, to July 1, 2040, if a new commercial airplane manufacturing program was sited in Washington by June 30, 2017. This contingency was satisfied when the Department of Revenue certified that Boeing had selected Everett as the location of final assembly of the 777X as well as the company's composite wing center.
The preferences share common accountability reporting
Beneficiaries of the aerospace tax preferences must file an annual tax performance report with the Department of Revenue (DOR). The report requires information detailing the amount of the tax preference claimed, and employment and wages for positions in Washington. Taxpayers may authorize DOR to obtain this information directly from the Employment Security Department. Most information contained in the annual tax performance report is subject to public disclosure, including:
- Employment and wage information for employment positions in Washington.
- Total number of full-time, part-time, and temporary positions.
- Amount of tax preference claimed.
Preferential B&O tax rates
Three of the preferences provide reduced business and occupation (B&O) tax rates for businesses that manufacture qualifying aerospace products and provide qualifying aerospace services.
After March 31, 2021, a preferential rate of 0.357% could be implemented if the following conditions are met:
- The United States and European Union reach an agreement resolving their World Trade Organization disputes regarding large civil airplanes that expressly allows preferential tax rates.
- The Washington State Department of Commerce notifies DOR in writing that such agreement has been reached and includes a copy of the notice to the Department of Commerce from the United States Trade Representative regarding the agreement.
- The Department of Labor and Industries notifies DOR that a significant commercial airplane manufacturer has at least a 0.3 percent aerospace apprenticeship utilization rate of its qualified apprenticeable workforce.
Two of these conditions have not been met and the preferential rate remains unavailable. There are no future taxpayer savings associated with this preference.
Businesses that research, design, or engineer aerospace products for commercial airplanes for others to manufacture are taxed at 0.9%. Firms providing research, design, and engineering services for others are generally taxed at the rate of 1.5% or 1.75%.
Figure 14: Beneficiary savings estimate, Aerospace product development, preferential B&O Tax Rate
Calendar Year |
Estimated Beneficiary Savings |
2024 |
$2,190,000 |
2025 |
$2,190,000 |
2026 |
$2,190,000 |
2027 |
$2,190,000 |
2028 |
$2,190,000 |
2029 |
$2,190,000 |
Source: JLARC analysis of DOR tax return data. Estimated future use based on 3-year average of 2020-22.
Federally certified aviation repair stations are taxed at a preferential B&O tax rate of 0.2904% on sales of repair services and component parts. Other interstate transportation equipment repair services are taxed at the B&O rate of 0.484%.
Figure 15: Beneficiary savings estimate, Certified aircraft repair firms, preferential B&O tax rate
Calendar Year |
Estimated Beneficiary Savings |
2024 |
$510,000 |
2025 |
$510,000 |
2026 |
$520,000 |
2027 |
$510,000 |
2028 |
$510,000 |
2029 |
$510,000 |
Source: JLARC analysis of DOR tax return data. Estimated future use based on 3-year average of 2020-22.
B&O tax credits
Two preferences provide credits against a taxpayer's B&O tax liability. The amount of each credit that may be claimed depends on the level of certain business expenditures or taxes.
This B&O tax credit is equal to 1.5% of qualifying expenditures for businesses that develop aerospace products. Qualifying expenditures include wages and benefits, supplies, and computer expenses, but not capital costs and overhead, such as expenses for land, structures, or depreciable property. The credit must be taken in the year in which the qualifying expenditures occur, except for credits earned before July 1, 2005, which can be carried over and used at a later date. If the amount of credit exceeds tax liability, the credit cannot be carried over to reduce tax liability in later years and cannot be refunded.
Figure 16: Beneficiary savings estimate, Aerospace product development expenditures, B&O tax credit
Calendar Year |
Estimated Beneficiary Savings |
2024 |
$51,450,000 |
2025 |
$51,450,000 |
2026 |
$51,450,000 |
2027 |
$51,450,000 |
2028 |
$51,450,000 |
2029 |
$51,450,000 |
Source: JLARC analysis of DOR tax return data. Estimated future use based on 3-year average of 2020-22.
This preference provides a B&O tax credit for property taxes or leasehold excise taxes paid on property used exclusively in manufacturing aerospace products, aerospace product development, or in providing aerospace services at certified aviation repair stations. The credit applies to new buildings, the land on which the buildings are located, and on the increase in assessed value from renovations and expansions. The credit is also available for property taxes paid on certain personal property.
To receive the B&O tax credit, buildings must be used exclusively in manufacturing commercial airplanes or their components, or tooling specifically designed for use in manufacturing. The credit may also be claimed for new buildings and land, renovations, and expansion for facilities used for aerospace product development and for maintenance, repair, overhaul, or refurbishing commercial airplanes or their components by federally certified aviation repair stations.
The B&O tax credit provided to aerospace businesses applies to manufacturing machinery and equipment, computer hardware, computer peripherals, and software if these items are exempt from sales and use taxes. The B&O tax credit for manufacturing machinery and equipment is calculated based on a firm's aerospace product income as a percentage of its total manufactured goods income.
The B&O tax credit cannot be claimed until the real and personal property taxes have been paid. If the credit exceeds B&O tax owed, it may be carried forward one year. Unused credits are not refundable.
Figure 17: Beneficiary savings estimate, Commercial airplane manufacturing, B&O tax credit for property/leasehold excise taxes paid
Calendar Year |
Estimated Beneficiary Savings |
2024 |
$38,590,000 |
2025 |
$38,590,000 |
2026 |
$38,590,000 |
2027 |
$38,590,000 |
2028 |
$38,590,000 |
2029 |
$38,590,000 |
Source: JLARC analysis of DOR tax return data. Estimated future use based on 3-year average of 2020-22.
Sales and Use Tax Exemptions
Two preferences exempt certain purchases from sales and use tax (SUT).
A sales and use tax exemption for sales of computer hardware, computer peripherals, and software used primarily in developing, designing, and engineering aerospace products and providing aerospace services. Aerospace services are defined in statute as maintenance, repair, overhaul, or refurbishing of commercial airplanes or their components by federally certified repair stations. Sales of or charges made for labor and services for installing the computer hardware, computer peripherals, and software are also exempt.
Figure 18: Beneficiary savings estimate, Aerospace product development computer expenditures, SUT exemption
Calendar Year |
Estimated Beneficiary Savings |
2024 |
$8,560,000 |
2025 |
$8,560,000 |
2026 |
$8,560,000 |
2027 |
$8,560,000 |
2028 |
$8,560,000 |
2029 |
$8,560,000 |
Source: JLARC analysis of DOR tax return data. Estimated future use based on 3-year average of 2020-22.
An exemption from sales and use taxes on labor, services, and materials to construct new buildings used for manufacturing commercial airplanes. The exemption also includes labor and services for installation of fixtures during construction of the new building. The exemption applies to either a manufacturer of commercial airplanes, fuselages, or wings, or to a port district, political subdivision, or municipal corporation leasing property to a manufacturer of those products.
Figure 19: Beneficiary savings estimate, Commercial airplane production facilities, SUT exemption
Calendar Year |
Estimated Beneficiary Savings |
2024 |
$1,420,000 |
2025 |
$1,420,000 |
2026 |
$1,420,000 |
2027 |
$1,420,000 |
2028 |
$1,420,000 |
2029 |
$1,420,000 |
Source: JLARC analysis of DOR tax return data. Estimated future use based on 5-year average of 2018-22.
Property and Leasehold Excise Tax Exemptions
Two preferences would exempt certain superefficient airplane (Boeing 787) manufacturing facilities from leasehold excise and property taxes if they were built on port property. Boeing chose to build its 787 final assembly facility on private property rather than property leased from a port. As such, no superefficient airplane manufacturing takes place on port district property, and these preferences have not been claimed.
Provides a leasehold excise tax exemption to the manufacturer of a "superefficient airplane" (Boeing 787) for a facility located on port district property.
This preference has not been claimed and beneficiary savings are $0.
Provides a property tax exemption for all personal property such as equipment and computers to the manufacturer of a "superefficient airplane" (Boeing 787) at a facility located on port district property.
This preference has not been claimed and beneficiary savings are $0.
Appendix C: Applicable statutes
This appendix provides the current statutes that govern the tax preferences that comprise this review. For sections that contain statutory provisions not related to the tax preferences, the relevant language is highlighted.
Tax on retailers.
(3)(a) Until July 1, 2040, upon every person classified by the federal aviation administration as a federal aviation regulation part 145 certificated repair station and that is engaging within this state in the business of making sales at retail that are exempt from the tax imposed under chapter 82.08 RCW by reason of RCW 82.08.0261, 82.08.0262, or 82.08.0263, as to such persons, the amount of tax with respect to such business is equal to the gross proceeds of sales of the business, multiplied by the rate of .2904 percent.
(b) A person reporting under the tax rate provided in this subsection (3) must file a complete annual report with the department under RCW 82.32.534.
[ 2014 c 97 § 402; (2014 c 97 § 401 expired July 9, 2014); 2013 3rd sp.s. c 2 § 7; 2010 1st sp.s. c 23 § 509; (2010 1st sp.s. c 23 § 508 expired July 1, 2011); (2010 1st sp.s. c 23 § 507 expired July 13, 2010); 2010 1st sp.s. c 11 § 1; (2010 c 114 § 106 expired July 1, 2011); 2008 c 81 § 5; (2007 c 54 § 5 repealed by 2010 1st sp.s. c 11 § 7); 2006 c 177 § 5; 2003 2nd sp.s. c 1 § 2; (2003 1st sp.s. c 2 § 1 expired July 1, 2006). Prior: 1998 c 343 § 5; 1998 c 312 § 4; 1993 sp.s. c 25 § 103; 1981 c 172 § 2; 1971 ex.s. c 281 § 4; 1971 ex.s. c 186 § 2; 1969 ex.s. c 262 § 35; 1967 ex.s. c 149 § 9; 1961 c 15 § 82.04.250; prior: 1955 c 389 § 45; prior: 1950 ex.s. c 5 § 1, part; 1949 c 228 § 1, part; 1943 c 156 § 1, part; 1941 c 178 § 1, part; 1939 c 225 § 1, part; 1937 c 227 § 1, part; 1935 c 180 § 4, part; Rem. Supp. 1949 § 8370-4, part.]
SELECTED NOTES:
Contingent effective date—2013 3rd sp.s. c 2: See RCW 82.32.850.
Findings—Intent—2013 3rd sp.s. c 2: See note following RCW 82.32.850.
Findings—Savings—Effective date—2008 c 81: See notes following RCW 82.08.975.
Finding—2003 2nd sp.s. c 1: See note following RCW 82.04.4461.Tax on manufacturers and processors of various foods and by-products—Research and development organizations—Travel agents—Certain international activities—Stevedoring and associated activities—Low-level waste disposers—Insurance producers, surplus line brokers, and title insurance agents—Hospitals—Commercial airplane activities—Timber product activities—Canned salmon processors. (Effective January 1, 2024, until January 1, 2034.)
(11)(a) Beginning October 1, 2005, upon every person engaging within this state in the business of manufacturing commercial airplanes, or components of such airplanes, or making sales, at retail or wholesale, of commercial airplanes or components of such airplanes, manufactured by the seller, as to such persons the amount of tax with respect to such business is, in the case of manufacturers, equal to the value of the product manufactured and the gross proceeds of sales of the product manufactured, or in the case of processors for hire, equal to the gross income of the business, multiplied by the rate of:
(i) 0.4235 percent from October 1, 2005, through June 30, 2007;
(ii) 0.2904 percent beginning July 1, 2007, through March 31, 2020; and
(iii) Beginning April 1, 2020, 0.484 percent, subject to any reduction required under (e) of this subsection (11). The tax rate in this subsection (11)(a)(iii) applies to all business activities described in this subsection (11)(a).
(b) Beginning July 1, 2008, upon every person who is not eligible to report under the provisions of (a) of this subsection (11) and is engaging within this state in the business of manufacturing tooling specifically designed for use in manufacturing commercial airplanes or components of such airplanes, or making sales, at retail or wholesale, of such tooling manufactured by the seller, as to such persons the amount of tax with respect to such business is, in the case of manufacturers, equal to the value of the product manufactured and the gross proceeds of sales of the product manufactured, or in the case of processors for hire, be equal to the gross income of the business, multiplied by the rate of:
(i) 0.2904 percent through March 31, 2020; and
(ii) Beginning April 1, 2020, the following rates, which are subject to any reduction required under (e) of this subsection (11):
(A) The rate under RCW 82.04.250(1) on the business of making retail sales of tooling specifically designed for use in manufacturing commercial airplanes or components of such airplanes; and
(B) 0.484 percent on all other business activities described in this subsection (11)(b).
(c) For the purposes of this subsection (11), "commercial airplane" and "component" have the same meanings as provided in RCW 82.32.550.
(d)(i) In addition to all other requirements under this title, a person reporting under the tax rate provided in this subsection (11) must file a complete annual tax performance report with the department under RCW 82.32.534. However, this requirement does not apply to persons reporting under the tax rate in (a)(iii) of this subsection (11), so long as that rate remains 0.484 percent, or under any of the tax rates in (b)(ii)(A) and (B) of this subsection (11), so long as those tax rates remain the rate imposed pursuant to RCW 82.04.250(1) and 0.484 percent, respectively.
(ii) Nothing in (d)(i) of this subsection (11) may be construed as affecting the obligation of a person reporting under a tax rate provided in this subsection (11) to file a complete annual tax performance report with the department under RCW 82.32.534: (A) Pursuant to another provision of this title as a result of claiming a tax credit or exemption; or (B) pursuant to (d)(i) of this subsection (11) as a result of claiming the tax rates in (a)(ii) or (b)(i) of this subsection (11) for periods ending before April 1, 2020.
(e)(i) After March 31, 2021, the tax rates under (a)(iii) and (b)(ii) of this subsection (11) must be reduced to 0.357 percent provided the conditions in RCW 82.04.2602 are met. The effective date of the rates authorized under this subsection (11)(e) must occur on the first day of the next calendar quarter that is at least 60 days after the department receives the last of the two written notices pursuant to RCW 82.04.2602 (3) and (4).
(ii) Both a significant commercial airplane manufacturer separately and the rest of the aerospace industry as a whole, receiving the rate of 0.357 percent under this subsection (11)(e) are subject to the aerospace apprenticeship utilization rates required under RCW 49.04.220 by April 1, 2026, or five years after the effective date of the 0.357 percent rate authorized under this subsection (11)(e), whichever is later, as determined by the department of labor and industries.
(iii) The provisions of RCW 82.32.805 and 82.32.808 do not apply to this subsection (11)(e).
(f)(i) Except as provided in (f)(ii) of this subsection (11), this subsection (11) does not apply on and after July 1, 2040.
(ii) With respect to the manufacturing of commercial airplanes or making sales, at retail or wholesale, of commercial airplanes, this subsection (11) does not apply on and after July 1st of the year in which the department makes a determination that any final assembly or wing assembly of any version or variant of a commercial airplane that is the basis of a siting of a significant commercial airplane manufacturing program in the state under RCW 82.32.850 has been sited outside the state of Washington. This subsection (11)(f)(ii) only applies to the manufacturing or sale of commercial airplanes that are the basis of a siting of a significant commercial airplane manufacturing program in the state under RCW 82.32.850. This subsection (11)(f)(ii) continues to apply during the time that a person is subject to the tax rate in (a)(iii) of this subsection (11).
(g) For the purposes of this subsection, "a significant commercial airplane manufacturer" means a manufacturer of commercial airplanes with at least 50,000 full-time employees in Washington as of January 1, 2021.
[ 2023 c 422 § 5; 2023 c 286 § 3; 2022 c 16 § 140; 2021 c 145 § 7; 2020 c 165 § 3. Prior: 2019 c 425 § 1; 2019 c 336 § 4; 2018 c 164 § 3; 2017 c 135 § 11; prior: 2015 3rd sp.s. c 6 § 602; 2015 3rd sp.s. c 6 § 205; prior: 2014 c 140 § 6; (2014 c 140 § 5 expired July 1, 2015); 2014 c 140 § 4; (2014 c 140 § 3 expired July 1, 2015); 2013 3rd sp.s. c 2 § 6; (2013 3rd sp.s. c 2 § 5 expired July 1, 2015); 2013 2nd sp.s. c 13 § 203; (2013 2nd sp.s. c 13 § 202 expired July 1, 2015); prior: (2012 2nd sp.s. c 6 § 602 expired July 1, 2015); 2012 2nd sp.s. c 6 § 204; 2011 c 2 § 203 (Initiative Measure No. 1107, approved November 2, 2010); 2010 1st sp.s. c 23 § 506; (2010 1st sp.s. c 23 § 505 expired June 10, 2010); 2010 c 114 § 107; prior: 2009 c 479 § 64; 2009 c 461 § 1; 2009 c 162 § 34; prior: 2008 c 296 § 1; 2008 c 217 § 100; 2008 c 81 § 4; prior: 2007 c 54 § 6; 2007 c 48 § 2; prior: 2006 c 354 § 4; 2006 c 300 § 1; prior: 2005 c 513 § 2; 2005 c 443 § 4; prior: 2003 2nd sp.s. c 1 § 4; 2003 2nd sp.s. c 1 § 3; 2003 c 339 § 11; 2003 c 261 § 11; 2001 2nd sp.s. c 25 § 2; prior: 1998 c 312 § 5; 1998 c 311 § 2; prior: 1998 c 170 § 4; 1996 c 148 § 2; 1996 c 115 § 1; prior: 1995 2nd sp.s. c 12 § 1; 1995 2nd sp.s. c 6 § 1; 1993 sp.s. c 25 § 104; 1993 c 492 § 304; 1991 c 272 § 15; 1990 c 21 § 2; 1987 c 139 § 1; prior: 1985 c 471 § 1; 1985 c 135 § 2; 1983 2nd ex.s. c 3 § 5; prior: 1983 1st ex.s. c 66 § 4; 1983 1st ex.s. c 55 § 4; 1982 2nd ex.s. c 13 § 1; 1982 c 10 § 16; prior: 1981 c 178 § 1; 1981 c 172 § 3; 1979 ex.s. c 196 § 2; 1975 1st ex.s. c 291 § 7; 1971 ex.s. c 281 § 5; 1971 ex.s. c 186 § 3; 1969 ex.s. c 262 § 36; 1967 ex.s. c 149 § 10; 1965 ex.s. c 173 § 6; 1961 c 15 § 82.04.260; prior: 1959 c 211 § 2; 1955 c 389 § 46; prior: 1953 c 91 § 4; 1951 2nd ex.s. c 28 § 4; 1950 ex.s. c 5 § 1, part; 1949 c 228 § 1, part; 1943 c 156 § 1, part; 1941 c 178 § 1, part; 1939 c 225 § 1, part; 1937 c 227 § 1, part; 1935 c 180 § 4, part; Rem. Supp. 1949 § 8370-4, part.]
SELECTED NOTES:
Findings—Intent—Effective date—2020 c 165: See notes following RCW 82.04.2602.
Contingent effective date—2013 3rd sp.s. c 2: See RCW 82.32.850.
Findings—Intent—2013 3rd sp.s. c 2: See note following RCW 82.32.850.
Findings—Savings—Effective date—2008 c 81: See notes following RCW 82.08.975.
Finding—2003 2nd sp.s. c 1: See note following RCW 82.04.4461.
Tax on service and other activities.
(3)(a) Until July 1, 2040, upon every person engaging within this state in the business of performing aerospace product development for others, as to such persons, the amount of tax with respect to such business is equal to the gross income of the business multiplied by a rate of 0.9 percent.
(b) A person reporting under the tax rate provided in this subsection (3) must file a complete annual report with the department under RCW 82.32.534.
(c) "Aerospace product development" has the meaning as provided in RCW 82.04.4461.
[ 2020 c 2 § 3; 2019 c 426 § 2; 2014 c 97 § 404; (2014 c 97 § 403 expired July 9, 2014); 2013 3rd sp.s. c 2 § 8; 2013 c 23 § 314; 2011 c 174 § 101; 2008 c 81 § 6; 2005 c 369 § 8; 2004 c 174 § 2; 2003 c 343 § 2; 2001 1st sp.s. c 9 § 6; (2001 1st sp.s. c 9 § 4 expired July 1, 2001). Prior: 1998 c 343 § 4; 1998 c 331 § 2; 1998 c 312 § 8; 1998 c 308 § 5; 1998 c 308 § 4; 1997 c 7 § 2; 1996 c 1 § 2; 1995 c 229 § 3; 1993 sp.s. c 25 § 203; 1985 c 32 § 3; 1983 2nd ex.s. c 3 § 2; 1983 c 9 § 2; 1983 c 3 § 212; 1971 ex.s. c 281 § 8; 1970 ex.s. c 65 § 4; 1969 ex.s. c 262 § 39; 1967 ex.s. c 149 § 14; 1963 ex.s. c 28 § 2; 1961 c 15 § 82.04.290; prior: 1959 ex.s. c 5 § 5; 1955 c 389 § 49; prior: 1953 c 195 § 2; 1950 ex.s. c 5 § 1, part; 1949 c 228 § 1, part; 1943 c 156 § 1, part; 1941 c 178 § 1, part; 1939 c 225 § 1, part; 1937 c 227 § 1, part; 1935 c 180 § 4, part; Rem. Supp. 1949 § 8370-4, part.]
Selected Notes:
Contingent expiration date—2014 c 97 §§ 401 and 403: See note following RCW 82.04.250.
Contingent effective date—2013 3rd sp.s. c 2: See RCW 82.32.850.
Findings—Intent—2013 3rd sp.s. c 2: See note following RCW 82.32.850.
Findings—Savings—Effective date—2008 c 81: See notes following RCW 82.08.975.Credit—Preproduction development expenditures. (Expires July 1, 2040.)
(1)(a)(i) In computing the tax imposed under this chapter, a credit is allowed for each person for qualified aerospace product development. For a person who is a manufacturer or processor for hire of commercial airplanes or components of such airplanes, credit may be earned for expenditures occurring after December 1, 2003. For all other persons, credit may be earned only for expenditures occurring after June 30, 2008.
(ii) For purposes of this subsection, "commercial airplane" and "component" have the same meanings as provided in RCW 82.32.550.
(b) Before July 1, 2005, any credits earned under this section must be accrued and carried forward and may not be used until July 1, 2005. These carryover credits may be used at any time thereafter, and may be carried over until used. Refunds may not be granted in the place of a credit.
(2) The credit is equal to the amount of qualified aerospace product development expenditures of a person, multiplied by the rate of 1.5 percent.
(3) Except as provided in subsection (1)(b) of this section the credit must be claimed against taxes due for the same calendar year in which the qualified aerospace product development expenditures are incurred. Credit earned on or after July 1, 2005, may not be carried over. The credit for each calendar year may not exceed the amount of tax otherwise due under this chapter for the calendar year. Refunds may not be granted in the place of a credit.
(4) Any person claiming the credit must file a form prescribed by the department that must include the amount of the credit claimed, an estimate of the anticipated aerospace product development expenditures during the calendar year for which the credit is claimed, an estimate of the taxable amount during the calendar year for which the credit is claimed, and such additional information as the department may prescribe.
(5) The definitions in this subsection apply throughout this section.
(a) "Aerospace product" has the meaning given in RCW 82.08.975.
(b) "Aerospace product development" means research, design, and engineering activities performed in relation to the development of an aerospace product or of a product line, model, or model derivative of an aerospace product, including prototype development, testing, and certification. The term includes the discovery of technological information, the translating of technological information into new or improved products, processes, techniques, formulas, or inventions, and the adaptation of existing products and models into new products or new models, or derivatives of products or models. The term does not include manufacturing activities or other production-oriented activities, however the term does include tool design and engineering design for the manufacturing process. The term does not include surveys and studies, social science and humanities research, market research or testing, quality control, sale promotion and service, computer software developed for internal use, and research in areas such as improved style, taste, and seasonal design.
(c) "Qualified aerospace product development" means aerospace product development performed within this state.
(d) "Qualified aerospace product development expenditures" means operating expenses, including wages, compensation of a proprietor or a partner in a partnership as determined by the department, benefits, supplies, and computer expenses, directly incurred in qualified aerospace product development by a person claiming the credit provided in this section. The term does not include amounts paid to a person or to the state and any of its departments and institutions, other than a public educational or research institution to conduct qualified aerospace product development. The term does not include capital costs and overhead, such as expenses for land, structures, or depreciable property.
(e) "Taxable amount" means the taxable amount subject to the tax imposed in this chapter required to be reported on the person's tax returns during the year in which the credit is claimed, less any taxable amount for which a credit is allowed under RCW 82.04.440.
(6) In addition to all other requirements under this title, a person claiming the credit under this section must file a complete annual tax performance report with the department under RCW 82.32.534.
(7) Credit may not be claimed for expenditures for which a credit is claimed under *RCW 82.04.4452.
(8) This section expires July 1, 2040.
[ 2017 c 135 § 15; 2013 3rd sp.s. c 2 § 9; 2010 c 114 § 115; 2008 c 81 § 7; 2007 c 54 § 11; 2003 2nd sp.s. c 1 § 7.]
SELECTED NOTES:
Contingent effective date—2013 3rd sp.s. c 2: See RCW 82.32.850.
Findings—Intent—2013 3rd sp.s. c 2: See note following RCW 82.32.850.
Findings—Savings—Effective date—2008 c 81: See notes following RCW 82.08.975.
Finding—2003 2nd sp.s. c 1: "The legislature finds that the people of the state have benefited from the presence of the aerospace industry in Washington state. The aerospace industry provides good wages and benefits for the thousands of engineers, mechanics, and support staff working directly in the industry throughout the state. The suppliers and vendors that support the aerospace industry in turn provide a range of jobs. The legislature declares that it is in the public interest to encourage the continued presence of this industry through the provision of tax incentives. The comprehensive tax incentives in this act address the cost of doing business in Washington state compared to locations in other states." [ 2003 2nd sp.s. c 1 § 1.]
Credit—Property and leasehold taxes paid on property used for manufacture of commercial airplanes. (Expires July 1, 2040.)
(1) In computing the tax imposed under this chapter, a credit is allowed for property taxes and leasehold excise taxes paid during the calendar year.
(2) The credit is equal to:
(a)(i)(A) Property taxes paid on buildings, and land upon which the buildings are located, constructed after December 1, 2003, and used exclusively in manufacturing commercial airplanes or components of such airplanes; and
(B) Leasehold excise taxes paid with respect to buildings constructed after January 1, 2006, the land upon which the buildings are located, or both, if the buildings are used exclusively in manufacturing commercial airplanes or components of such airplanes; and
(C) Property taxes or leasehold excise taxes paid on, or with respect to, buildings constructed after June 30, 2008, the land upon which the buildings are located, or both, and used exclusively for aerospace product development, manufacturing tooling specifically designed for use in manufacturing commercial airplanes or their components, or in providing aerospace services, by persons not within the scope of (a)(i)(A) and (B) of this subsection (2) and are taxable under RCW 82.04.290(3), 82.04.260(11)(b), or 82.04.250(3); or
(ii) Property taxes attributable to an increase in assessed value due to the renovation or expansion, after: (A) December 1, 2003, of a building used exclusively in manufacturing commercial airplanes or components of such airplanes; and (B) June 30, 2008, of buildings used exclusively for aerospace product development, manufacturing tooling specifically designed for use in manufacturing commercial airplanes or their components, or in providing aerospace services, by persons not within the scope of (a)(ii)(A) of this subsection (2) and are taxable under RCW 82.04.290(3), 82.04.260(11)(b), or 82.04.250(3); and
(b) An amount equal to:
(i)(A) Property taxes paid, by persons taxable under RCW 82.04.260(11)(a), on machinery and equipment exempt under RCW 82.08.02565 or 82.12.02565 and acquired after December 1, 2003;
(B) Property taxes paid, by persons taxable under RCW 82.04.260(11)(b), on machinery and equipment exempt under RCW 82.08.02565 or 82.12.02565 and acquired after June 30, 2008; or
(C) Property taxes paid, by persons taxable under RCW 82.04.250(3) or 82.04.290(3), on computer hardware, computer peripherals, and software exempt under RCW 82.08.975 or 82.12.975 and acquired after June 30, 2008.
(ii) For purposes of determining the amount eligible for credit under (i)(A) and (B) of this subsection (2)(b), the amount of property taxes paid is multiplied by a fraction.
(A) The numerator of the fraction is the total taxable amount subject to the tax imposed under RCW 82.04.260(11) (a) or (b) on the applicable business activities of manufacturing commercial airplanes, components of such airplanes, or tooling specifically designed for use in the manufacturing of commercial airplanes or components of such airplanes.
(B) The denominator of the fraction is the total taxable amount subject to the tax imposed under all manufacturing classifications in chapter 82.04 RCW.
(C) For purposes of both the numerator and denominator of the fraction, the total taxable amount refers to the total taxable amount required to be reported on the person's returns for the calendar year before the calendar year in which the credit under this section is earned. The department may provide for an alternative method for calculating the numerator in cases where the tax rate provided in RCW 82.04.260(11) for manufacturing was not in effect during the full calendar year before the calendar year in which the credit under this section is earned.
(D) No credit is available under (b)(i)(A) or (B) of this subsection (2) if either the numerator or the denominator of the fraction is zero. If the fraction is greater than or equal to nine-tenths, then the fraction is rounded to one.
(E) As used in (b)(ii)(C) of this subsection (2), "returns" means the tax returns for which the tax imposed under this chapter is reported to the department.
(3) The definitions in this subsection apply throughout this section, unless the context clearly indicates otherwise.
(a) "Aerospace product development" has the same meaning as provided in RCW 82.04.4461.
(b) "Aerospace services" has the same meaning given in RCW 82.08.975.
(c) "Commercial airplane" and "component" have the same meanings as provided in RCW 82.32.550.
(4) A credit earned during one calendar year may be carried over to be credited against taxes incurred in a subsequent calendar year, but may not be carried over a second year. No refunds may be granted for credits under this section.
(5) In addition to all other requirements under this title, a person claiming the credit under this section must file a complete annual tax performance report with the department under RCW 82.32.534.
(6) This section expires July 1, 2040.
[ 2017 c 135 § 16; 2013 3rd sp.s. c 2 § 10; 2010 1st sp.s. c 23 § 515; (2010 1st sp.s. c 23 § 514 expired June 10, 2010); 2010 c 114 § 116; 2008 c 81 § 8; 2006 c 177 § 10; 2005 c 514 § 501; 2003 2nd sp.s. c 1 § 15.]
SELECTED NOTES:
Contingent effective date—2013 3rd sp.s. c 2: See RCW 82.32.850.
Findings—Intent—2013 3rd sp.s. c 2: See note following RCW 82.32.850.
Findings—Savings—Effective date—2008 c 81: See notes following RCW 82.08.975.
Finding—2003 2nd sp.s. c 1: See note following RCW 82.04.4461
Exemptions—Computer parts and software related to the manufacture of commercial airplanes. (Expires July 1, 2040.)
(1) The tax levied by RCW 82.08.020 does not apply to sales of computer hardware, computer peripherals, or software, not otherwise eligible for exemption under RCW 82.08.02565, used primarily in the development, design, and engineering of aerospace products or in providing aerospace services, or to sales of or charges made for labor and services rendered in respect to installing the computer hardware, computer peripherals, or software.
(2) The exemption is available only when the buyer provides the seller with 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.
(3) The definitions in this subsection apply throughout this section unless the context requires otherwise.
(a) "Aerospace products" means:
(i) Commercial airplanes and their components;
(ii) Machinery and equipment that is designed and used primarily for the maintenance, repair, overhaul, or refurbishing of commercial airplanes or their components by federal aviation regulation part 145 certificated repair stations; and
(iii) Tooling specifically designed for use in manufacturing commercial airplanes or their components.
(b) "Aerospace services" means the maintenance, repair, overhaul, or refurbishing of commercial airplanes or their components, but only when such services are performed by a FAR part 145 certificated repair station.
(c) "Commercial airplane" and "component" have the same meanings provided in RCW 82.32.550.
(d) "Peripherals" includes keyboards, monitors, mouse devices, and other accessories that operate outside of the computer, excluding cables, conduit, wiring, and other similar property.
(4) This section expires July 1, 2040.
[ 2013 3rd sp.s. c 2 § 11; 2008 c 81 § 2; 2003 2nd sp.s. c 1 § 9.]
SELECTED NOTES:
Contingent effective date—2013 3rd sp.s. c 2: See RCW 82.32.850.
Findings—Intent—2013 3rd sp.s. c 2: See note following RCW 82.32.850.
Findings—2008 c 81: "The legislature finds that the aerospace industry provides good wages and benefits for the thousands of engineers, mechanics, support staff, and other employees working directly in the industry throughout the state. The legislature further finds that suppliers and vendors that support the aerospace industry in turn provide a range of well-paying jobs. In 2003, and again in 2006, the legislature determined it was in the public interest to encourage the continued presence of this industry through the provision of tax incentives. However, the legislature recognizes that key elements of Washington's aerospace industry cluster were afforded few, if any, of the aerospace tax incentives enacted in 2003 and 2006. The comprehensive tax incentives in this act are intended to more comprehensively address the cost of doing business in Washington state compared to locations in other states for a larger segment of the aerospace industry cluster." [ 2008 c 81 § 1.]
Finding—2003 2nd sp.s. c 1: See note following RCW 82.04.4461.
Computer parts and software related to the manufacture of commercial airplanes. (Expires July 1, 2040.)
(1) The provisions of this chapter do not apply in respect to the use of computer hardware, computer peripherals, or software, not otherwise eligible for exemption under RCW 82.12.02565, used primarily in the development, design, and engineering of aerospace products or in providing aerospace services, or to the use of labor and services rendered in respect to installing the computer hardware, computer peripherals, or software.
(2) As used in this section, "peripherals," "aerospace products," and "aerospace services" have the same meanings as provided in RCW 82.08.975.
(3) This section expires July 1, 2040.
[ 2013 3rd sp.s. c 2 § 12; 2008 c 81 § 3; 2003 2nd sp.s. c 1 § 10.]
NOTES:
Contingent effective date—2013 3rd sp.s. c 2: See RCW 82.32.850.
Findings—Intent—2013 3rd sp.s. c 2: See note following RCW 82.32.850.
Findings—Savings—Effective date—2008 c 81: See notes following RCW 82.08.975.
Finding—2003 2nd sp.s. c 1: See note following RCW 82.04.4461.
Exemptions—Labor, services, and personal property related to the manufacture of commercial airplanes. (Expires July 1, 2040.)
(1) The tax levied by RCW 82.08.020 does not apply to:
(a) Charges, for labor and services rendered in respect to the constructing of new buildings, made to (i) a manufacturer engaged in the manufacturing of commercial airplanes or the fuselages or wings of commercial airplanes or (ii) a port district, political subdivision, or municipal corporation, to be leased to a manufacturer engaged in the manufacturing of commercial airplanes or the fuselages or wings of commercial airplanes;
(b) Sales of tangible personal property that will be incorporated as an ingredient or component of such buildings during the course of the constructing; or
(c) Charges made for labor and services rendered in respect to installing, during the course of constructing such buildings, building fixtures not otherwise eligible for the exemption under RCW 82.08.02565(2)(b).
(2) The exemption is available only when the buyer provides the seller with 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.
(3) No application is necessary for the tax exemption in this section. However, in order to qualify under this section before starting construction, the port district, political subdivision, or municipal corporation must have entered into an agreement with the manufacturer to build such a facility. A person claiming the exemption under this section is subject to all the requirements of chapter 82.32 RCW. In addition, the person must file a complete annual tax performance report with the department under RCW 82.32.534.
(4) The exemption in this section applies to buildings or parts of buildings, including buildings or parts of buildings used for the storage of raw materials or finished product, that are used primarily in the manufacturing of any one or more of the following products:
(a) Commercial airplanes;
(b) Fuselages of commercial airplanes; or
(c) Wings of commercial airplanes.
(5) For the purposes of this section, "commercial airplane" has the meaning given in RCW 82.32.550.
(6) This section expires July 1, 2040.
[ 2017 c 135 § 25; 2013 3rd sp.s. c 2 § 3; 2010 c 114 § 126; 2003 2nd sp.s. c 1 § 11.]
SELECTED NOTES:
Contingent effective date—2013 3rd sp.s. c 2: See RCW 82.32.850.
Findings—Intent—2013 3rd sp.s. c 2: See note following RCW 82.32.850.
Finding—2003 2nd sp.s. c 1: See note following RCW 82.04.4461.
Exemptions—Labor, services, and personal property related to the manufacture of commercial airplanes. (Expires July 1, 2040.)
(1) The provisions of this chapter do not apply with respect to the use of:
(a) Tangible personal property that will be incorporated as an ingredient or component in constructing new buildings for (i) a manufacturer engaged in the manufacturing of commercial airplanes or the fuselages or wings of commercial airplanes or (ii) a port district, political subdivision, or municipal corporation, to be leased to a manufacturer engaged in the manufacturing of commercial airplanes or the fuselages or wings of commercial airplanes; or
(b) Labor and services rendered in respect to installing, during the course of constructing such buildings, building fixtures not otherwise eligible for the exemption under RCW 82.08.02565(2)(b).
(2) The eligibility requirements, conditions, and definitions in RCW 82.08.980 apply to this section, including the filing of a complete annual tax performance report with the department under RCW 82.32.534.
(3) This section expires July 1, 2040.
[ 2017 c 135 § 33; 2013 3rd sp.s. c 2 § 4; 2010 c 114 § 132; 2003 2nd sp.s. c 1 § 12.]
NOTES:
Effective date—2017 c 135: See note following RCW 82.32.534.
Contingent effective date—2013 3rd sp.s. c 2: See RCW 82.32.850.
Findings—Intent—2013 3rd sp.s. c 2: See note following RCW 82.32.850.
Application—Finding—Intent—2010 c 114: See notes following RCW 82.32.534.
Finding—2003 2nd sp.s. c 1: See note following RCW 82.04.4461.
Exemptions—Certain leasehold interests related to the manufacture of superefficient airplanes. (Expires July 1, 2040.)
(1) All leasehold interests in port district facilities exempt from tax under RCW 82.08.980 or 82.12.980 and used by a manufacturer engaged in the manufacturing of superefficient airplanes, as defined in RCW 82.32.550, are exempt from tax under this chapter. A person claiming the credit under RCW 82.04.4463 is not eligible for the exemption under this section.
(2) In addition to all other requirements under this title, a person claiming the exemption under this section must file a complete annual tax performance report with the department under RCW 82.32.534.
(3) This section expires July 1, 2040.
[ 2017 c 135 § 35; 2013 3rd sp.s. c 2 § 13; 2010 c 114 § 134; 2003 2nd sp.s. c 1 § 13.]
SELECTED NOTES:
Contingent effective date—2013 3rd sp.s. c 2: See RCW 82.32.850.
Findings—Intent—2013 3rd sp.s. c 2: See note following RCW 82.32.850.
Finding—2003 2nd sp.s. c 1: See note following RCW 82.04.4461.
Property related to the manufacture of superefficient airplanes. (Expires July 1, 2040.)
(1) Effective January 1, 2005, all buildings, machinery, equipment, and other personal property of a lessee of a port district eligible under RCW 82.08.980 and 82.12.980, used exclusively in manufacturing superefficient airplanes, are exempt from property taxation. A person taking the credit under RCW 82.04.4463 is not eligible for the exemption under this section. For the purposes of this section, "superefficient airplane" and "component" have the meanings given in RCW 82.32.550.
(2) In addition to all other requirements under this title, a person claiming the exemption under this section must file a complete annual tax performance report with the department under RCW 82.32.534.
(3) Claims for exemption authorized by this section must be filed with the county assessor on forms prescribed by the department and furnished by the assessor. The assessor must verify and approve claims as the assessor determines to be justified and in accordance with this section. No claims may be filed after December 31, 2039. The department may adopt rules, under the provisions of chapter 34.05 RCW, as necessary to properly administer this section.
(4) This section applies to taxes levied for collection in 2006 and thereafter.
(5) This section expires July 1, 2040.
[ 2017 c 135 § 46; 2013 3rd sp.s. c 2 § 14; 2010 c 114 § 151; 2003 2nd sp.s. c 1 § 14.]
SELECTED NOTES:
Contingent effective date—2013 3rd sp.s. c 2: See RCW 82.32.850.
Findings—Intent—2013 3rd sp.s. c 2: See note following RCW 82.32.850.
Finding—2003 2nd sp.s. c 1: See note following RCW 82.04.4461.
The rate of 0.357 percent authorized pursuant to RCW 82.04.260(11)(e) may be imposed only if the following conditions are met:
(1) The department of commerce verifies with the United States trade representative that the United States and the European Union have entered into a written agreement that resolves any world trade organization disputes involving large civil aircraft.
(2) Such agreement expressly allows a business and occupation tax rate reduction for commercial airplane manufacturers to 0.357 percent or less.
(3) The department of commerce notifies the department in writing that the conditions of subsections (1) and (2) of this section are met and provides a copy of the agreement between the United States and the European Union or other document providing for the business and occupation tax rate reduction to the department.
(4) The department of labor and industries notifies the department in writing that a significant commercial airplane manufacturer has at least a three-tenths of one percent aerospace apprenticeship utilization rate of its qualified apprenticeable workforce in Washington, as defined in RCW 49.04.220.
(5) Within thirty days of receiving the last of the written notices described in subsections (3) and (4) of this section, the department must provide written notice to the chief clerk of the house of representatives, the secretary of the senate, the office of the code reviser, and others as deemed appropriate by the department, that the tax rates in RCW 82.04.260(11)(e) are reduced to 0.357 percent and the effective date of the rate reduction.
(6) Any rate reduction to 0.357 percent pursuant to this section and RCW 82.04.260(11)(e) must occur on the first day of the next calendar quarter that is at least sixty days after the department receives the last of the written notices described in subsections (3) and (4) of this section.
(7) For the purpose of this section, "world trade organization disputes involving large civil airplanes" means any disputes filed by the United States or the European Union prior to March 25, 2020, that involve either allegations of subsidies to large civil airplanes, or allegations of taxes imposed by Washington on commercial airplanes, or both.
[ 2020 c 165 § 2.]
NOTES:
Findings—Intent—2020 c 165: "(1) Over the past two decades, the legislature has taken significant action to promote a positive business environment for Washington's aerospace industry. The legislature finds that the industry plays a significant role not only in the health of Washington's economy, but also in the health of the United States economy. Moreover, the domestic aerospace industry has faced significant challenges with the large subsidies provided to international competitors.
(2) The legislature finds that a commitment to the elimination of trade barriers for aerospace as well as several other vital Washington exports is important. The legislature also wishes to help bring the United States into full compliance with a recent world trade organization ruling asserting Washington's business and occupation tax rate of 0.2904 percent violates world trade organization rules. The legislature hopes this action to help bring the United States into compliance will end the threat of retaliatory tariffs against many of Washington's industries, including agricultural products, fish, wine, and intellectual property.
(3) The legislature appreciates the state aerospace industry's commitment to complying with the world trade organization ruling by advocating for the repeal of the preferential business and occupation tax. The legislature hopes that the repeal of this Washington aerospace preference will ensure continued economic success and competitiveness for the industry as well as many other industries. The legislature further hopes that the repeal of the 0.2904 business and occupation tax will allow for the complete resolution of all trade disputes surrounding large civil aircraft.
(4) The legislature further finds that the people of Washington benefit from the presence of the aerospace industry in Washington state. The industry provides good wages and benefits for thousands of engineers, technicians, mechanics, and support staff working across the state. Furthermore, the legislature has a goal of preserving and growing employment in Washington state. The legislature intends that the future consideration of all tax measures will work to achieve this goal in a manner compliant with the world trade organization." [ 2020 c 165 § 1.]
Effective date—2020 c 165: "This act is necessary for the immediate preservation of the public peace, health, or safety, or support of the state government and its existing public institutions, and takes effect immediately [March 25, 2020]." [ 2020 c 165 § 6.]
Appendix D: Study questions
This study aimed to answer the following questions, which were presented to JLARC in September 2023 (view here).
- Have the preferences and their use changed since JLARC reviewed them in 2019?
- Is the Legislative Auditor's 2019 recommendation applicable to current circumstances?
- What are the racial and ethnic characteristics of those that benefit from the tax preferences and their employees?
Methods
The methodology JLARC staff use when conducting analyses is tailored to the scope of each study, but generally includes the following:
- Interviews with stakeholders, agency representatives, and other relevant organizations or individuals.
- Site visits to entities that are under review.
- Document reviews, including applicable laws and regulations, agency policies and procedures pertaining to study objectives, and published reports, audits or studies on relevant topics.
- Data analysis, which may include data collected by agencies and/or data compiled by JLARC staff. Data collection sometimes involves surveys or focus groups.
- Consultation with experts when warranted. JLARC staff consult with technical experts when necessary to plan our work, to obtain specialized analysis from experts in the field, and to verify results.
The methods used in this study were conducted in accordance with Generally Accepted Government Auditing Standards.
More details about specific methods related to individual study objectives are described in the body of the report under the report details tab or in technical appendices.
Appendix E: Audit authority
The Joint Legislative Audit and Review Committee (JLARC) works to make state government operations more efficient and effective. The Committee is comprised of an equal number of House members and Senators, Democrats and Republicans.
JLARC's nonpartisan staff auditors, under the direction of the Legislative Auditor, conduct performance audits, program evaluations, sunset reviews, and other analyses assigned by the Legislature and the Committee.
The statutory authority for JLARC, established in Chapter 44.28 RCW, requires the Legislative Auditor to ensure that JLARC studies are conducted in accordance with Generally Accepted Government Auditing Standards, as applicable to the scope of the audit. This study was conducted in accordance with those applicable standards. Those standards require auditors to plan and perform audits to obtain sufficient, appropriate evidence to provide a reasonable basis for findings and conclusions based on the audit objectives. The evidence obtained for this JLARC report provides a reasonable basis for the enclosed findings and conclusions, and any exceptions to the application of audit standards have been explicitly disclosed in the body of this report.
Appendix F: Study process
View guide to JLARC Tax Preference Reviews here.
JLARC members on publication date
SenatorsBob Hasegawa Liz Lovelett Mark Mullet, Chair Ann Rivers Jesse Salomon Shelly Short Lynda Wilson, Secretary Keith Wagoner |
RepresentativesEmily Alvarado Stephanie Barnard April Berg Jake Fey Keith Goehner Stephanie McClintock Ed Orcutt, Vice Chair Gerry Pollet, Assistant Secretary |
Citizen Commission for Performance Measurement of Tax Preferences
Voting membersDr. Grant D. Forsyth, Chair Andi Nofziger-Meadows, Vice Chair Ronald L. Bueing Dr. Sharon Kioko James Orr |
Non-voting membersMark Mullet, JLARC Chair Pat McCarthy, State Auditor |