This week the Department of Revenue presented two draft regulations that it expects to finalize in early 2013. WAC 458-20-257 is scheduled for a CR-102 hearing on January 3, 2013 with an intended adoption date of January 10, 2013. WAC 458-20-162 is scheduled for a CR-105 expedited adoption requiring that any comments be submitted.
WAC 458-20-162 governs the taxation of stockbrokers and security houses. This rule is being amended primarily to update the apportionment references for statutory changes that occurred in 2010 and the resulting regulations adopted earlier this year on service apportionment. There are no significant changes, except that the rule now references apportionment methods for periods prior to June 1, 2010 (458-20-194) and for periods after May 31 2010 (458-20-19402).
Although the amendments to Rule 162 are not particularly significant, the apportionment changes reflecting market based service apportionment for periods on or after June 1, 2010 that were the subject of WAC 458-20-19402 adopted earlier this year are quite significant. Any taxpayers in these businesses that have not changed their apportionment practices since 2010 or earlier will find that their tax apportionment has significantly changed and should immediately review their apportionment practices.
The other regulation amended by the Department of Revenue is WAC 458-20-257 governing the taxation of warranties and service agreements. This rule had not been previously amended after Washington changed its statutes to treat the sale of extended warranties as retail sales. Rule 257 has been completely overhauled to reflect these changes. The result is a much clearer explanation of Washington’s taxation scheme for extended warranties and service agreements.
Rule 257, as revised, contains no unexpected provisions. The one provision that will surprise some taxpayers is that extended warranties on tangible personal property that is otherwise exempt from retail sales tax are not exempt from retail sales tax. The Department of Revenue has long adopted reasoning that unless separately sold extended warranties are expressly included as a part of a sales tax exemption, such extended warranties, will be subject to retail sales tax even though the equipment purchased is exempt from retail sales tax.
Taxpayers that are aware of this provision should always demand that any warranties purchased along with exempt equipment are included within a single negotiated price for the equipment. In this case, the extended warranty is treated as a part of the sale of the equipment and is exempt in accord with the exemption for the equipment.
Taxpayer should also be aware and avoid mixed agreements involving the sale of a warranty and a service contract. As mentioned previously, extended warranties on equipment that is exempt from sales tax are subject to use retail sales tax. However, certain exemptions, such as the manufacturing machinery and equipment exemption, apply to service contracts for the maintenance and repair of that equipment. When these exempt service contracts are bundled with extended warranties, the sales taxable warranties will taint the entire agreement causing the otherwise exempt service contract to become subject to retail sales tax.
Should you have any questions regarding either of these rules or any other issues regarding Washington taxation please contact me for consultation.