(1) Introduction. Timber harvest operations generally consist of a variety of activities. Depending on the nature of the activity, different tax types and tax rates may apply, such as the business and occupation (B&O) tax, public utility tax (PUT), retail sales tax, use tax, real estate excise tax (REET), and timber harvest excise tax (timber excise tax). See chapters 82.04, 82.08, 82.12, 82.16, 82.45, and 84.33 RCW.

(a) Scope of rule. This rule explains the application of the B&O tax, PUT, retail sales, and use taxes to persons performing activities associated with timber harvest operations, including timber harvesters, manufacturers of timber or wood products, extractors for hire, processors for hire, sellers of real property, and consumers of tangible personal property typically used in timber harvest operations. In addition, this rule explains how the PUT deduction provided by RCW 82.16.050 for the transportation of commodities to an export facility applies to the transportation of logs and provides details on how to apply the B&O tax exemption for small timber harvesters.

(b) Other rules that may be relevant.

(i) Persons engaged in timber harvest operations should refer to the following rules for additional information:

(A) WAC 458-20-135 Extracting natural products;

(B) WAC 458-20-136 Manufacturing, processing for hire, fabricating;

(C) WAC 458-20-13601 Manufacturers and processors for hire—Sales and use tax exemption for machinery and equipment.

(ii) Persons engaged in timber harvesting activities may be subject to the timber excise tax or REET. This rule does not cover either of those taxes in detail. For more information on timber excise tax and REET, readers should refer to:

(A) Chapter 458-40 WAC Taxation of forest land and timber; and

(B) Chapter 458-61A WAC Real estate excise tax.

(iii) Persons cultivating short-rotation hardwoods are considered farmers. "Short-rotation hardwoods" are hardwood trees, such as hybrid cottonwoods, cultivated by agricultural methods in growing cycles shorter than 15 years. RCW 84.33.035. For tax-reporting information for farmers and persons selling property to, or performing horticultural service for, farmers, readers should refer to:

(A) WAC 458-20-209 Farming for hire and horticultural services performed for farmers; and

(B) WAC 458-20-210 Sales of tangible personal property for farming—Sales of agricultural products by farmers.

(c) Examples. This rule contains examples that identify a number of facts and then state a conclusion. The examples should be used only as a general guide. The tax results of other situations must be determined after a review of all the facts and circumstances.

(2) Timber harvesters. Timber harvesters may engage in a variety of business activities, each subject to different tax reporting and collection obligations, including B&O tax under the extracting, manufacturing, wholesaling, or retailing classifications; retail sales tax; and use tax. Timber harvesters are eligible for preferential B&O tax rates on certain qualifying business activities until July 1, 2045. RCW 82.04.260(12).

(a) Definition of "harvester." With respect to timber, the term "harvester" means, every person who, from the person's own land or from the land of another under a right or license granted by lease or contract, either directly or by contracting with others for the necessary labor or mechanical services, fells, cuts, or takes timber for sale or for commercial or industrial use. RCW 84.33.035.

(i) When a government entity, i.e., the United States or any instrumentality thereof; the state, including its departments and institutions and political subdivisions; or any municipal corporation, fells, cuts, or takes timber for sale or for commercial or industrial use, the first person other than that government entity who acquires title to or possessory interest in the timber is considered the harvester.

(ii) The term "harvester" does not include persons performing, under contract, the necessary labor or mechanical services for a harvester.

(iii) For purposes of B&O tax, a timber "harvester" is considered an "extractor," as that term is defined in RCW 82.04.100. In general, an extractor is subject to extracting B&O tax upon the value of the extracted products. RCW 82.04.230 and WAC 458-20-135. A timber harvester may also be a "manufacturer" as defined in RCW 82.04.110 if the harvester subsequently performs a manufacturing activity as defined in RCW 82.04.120 (1)(c) involving the extracted trees. The type of excise tax under which a timber harvester must report and pay is dependent on the business activities the timber harvester conducts. See (b) through (g) of this subsection for additional information.

(b) Timber purchasers - Special reporting requirements. A purchaser of privately owned timber in excess of 200,000 board feet in a voluntary sale made in the ordinary course of business must report the particulars of the purchase to the department of revenue (department) on or before the last day of the month following the purchase of the timber. RCW 84.33.088.

(i) The report must contain all information relevant to the value of the timber purchased including, but not limited to, the following, as applicable: Purchaser's name, address and contact information; seller's name, address, and contact information; sale date; termination date in sale agreement; total sale price; legal description of sale area; sale name; forest practice application/harvest permit number if available; total acreage involved in the sale; estimated net volume of timber purchased by tree species and log grade; and description and value of property improvements.

(ii) The report must be filed on or before the last day of the month following the timber purchase date. A penalty of $250 may be imposed against a purchaser for each failure to file this report. These filing requirements are scheduled to expire September 30, 2025. RCW 84.33.088.

(c) Extracting. The felling, cutting (severing from land), or taking of trees is an extracting activity as defined in RCW 82.04.100. The extracting B&O tax classification applies to the value of the products extracted, which generally is the gross proceeds of sales, whether such sales are at wholesale or at retail. See RCW 82.04.230 and WAC 458-20-112.

(i) Until July 1, 2045, timber extractors are eligible for a preferential B&O tax rate for timber extracting activities. RCW 82.04.260 (12)(a). Taxpayers reporting under the preferential extracting timber B&O tax classification in the current year are required to complete an Annual Tax Performance Report by May 31st of the following year.

(ii) Small harvesters, as defined in RCW 84.33.035, are not required to complete an Annual Tax Performance Report with the department.

(d) Manufacturing. The cutting into length (bucking), delimbing, and measuring (for bucking) of felled, cut (severed), or taken trees is a manufacturing activity as defined in RCW 82.04.120. The manufacturing B&O tax is measured by the value of the products manufactured, which is generally the gross proceeds of sale. For more information regarding the value of products see RCW 82.04.450 and WAC 458-20-112.

(i) For timber harvest operations, the manufacturing portion of the operation begins after the standing timber has been extracted (felled, cut (severed from land), or taken) if the severed trees are subsequently measured, delimbed, and bucked at the manufacturing (harvest) site. The manufacturing site includes the entire contiguous area that is being actively logged (known as a "cutting area" or "harvest unit"). For timber harvest operations, manufacturing activities include bucking (cutting into length), delimbing, and measuring of felled, cut (severed from the land), or taken trees.

(ii) If the product is delivered to a point outside the state, transportation costs incurred by the seller from the last point at which manufacturing takes place within Washington may be deducted from the gross proceeds of sale when determining the value of the product, depending on the extent of the additional manufacturing activity conducted subsequent to the manufacturing conducted at the harvest site. See WAC 458-20-112.

(A) If there is no further manufacturing subsequent to manufacturing conducted at the harvest site, the measure of tax is the gross proceeds of the sale of the logs less transportation costs incurred by the seller from the harvest site to delivery to the customer out-of-state;

(B) If logs are hauled to a separate manufacturing facility for processing into lumber, poles, or piles, the measure of tax is the gross proceeds of sale of the lumber, poles, or piles less transportation costs incurred by the seller from the manufacturing facility to the place of delivery to the customer out-of-state; and

(C) If logs are hauled to a facility that only removes the bark, the measure of tax is the gross proceeds of sale of the logs less transportation costs incurred by the seller from the harvest site to the place of delivery to the customer out-of-state. This is because the mere removal of bark is not a manufacturing activity.

However, if at that facility the debarking is a part of a broader manufacturing process (e.g., cutting the logs into lumber), the entire process, including the debarking, is a manufacturing activity. In this case, the measure of tax is the gross proceeds of sale of the products manufactured from the logs less transportation costs incurred by the seller from the manufacturing facility to the place of delivery to the customer out-of-state.

(iii) Until July 1, 2045, persons who manufacture timber into timber products or wood products; timber products into other timber products or wood products; or mass timber products defined in RCW 19.27.570(1), are eligible to report their gross proceeds of sales under a preferential manufacturing of timber or wood products B&O tax classification. RCW 82.04.260 (12)(b). Taxpayers claiming this preferential B&O tax rate in the current year are required to complete an Annual Tax Performance Report by May 31st of the following year.

Small harvesters, as defined in RCW 84.33.035, are not required to complete an Annual Tax Performance Report with the department.

(e) Selling. Sales of felled timber and timber products are subject to B&O tax under either the wholesaling or retailing classification, as the case may be, unless exempt by law. The measure of tax is the gross proceeds of sales without any deduction for transportation costs.

(i) When determining the gross proceeds of sales, the timber harvester may not deduct amounts paid to others.

Example 1. Measure of B&O tax for timber harvester.Facts: UVW Company (UVW), a timber harvester and a timber manufacturer, enters into a contract with QRS Company (QRS), in which QRS agrees to perform the necessary labor and mechanical services for extracting the timber, and for manufacturing (measuring, delimbing, and bucking of) the felled timber. UVW receives 60 percent of the gross proceeds from sales of the logs, and QRS receives 40 percent. A third-party buyer located in Washington purchases the logs from UVW for $500,000. The buyer pays $300,000 to UVW for the log sales and $200,000 to QRS for performing the harvesting services.

Result: UVW is required to report the entire $500,000 in sales proceeds for B&O tax purposes, regardless of the fact that QRS received $200,000 of the sales proceeds directly from the buyer. In accordance with RCW 82.04.070, there is no deduction for the cost of doing business; therefore, UVW may not deduct the amount UVW paid to QRS for performing harvesting services. As a harvester and manufacturer, UVW must report $500,000 under extracting B&O tax, manufacturing B&O tax, and retailing or wholesaling B&O tax, depending on whether the third-party buyer is buying the logs for resale. UVW is eligible for a multiple activities tax credit (MATC) because UVW is selling the logs it extracted and manufactured in Washington to a Washington customer. See (g) of this subsection for more information on the MATC.

(ii) Retail sales tax must be collected and remitted on all sales to consumers, unless a statutory exemption applies. For wholesale sales, sellers must obtain and retain copies of their customers' reseller permits to document the wholesale nature of the transaction or otherwise comply with RCW 82.04.470. For information on reseller permits see WAC 458-20-102 and 458-20-10201.

(iii) Until July 1, 2045, persons who make wholesale sales of eligible products may report their gross proceeds of sales under the preferential wholesaling of timber or wood products B&O tax classification. RCW 82.04.260 (12)(c). Taxpayers who claim this preference in the current calendar year must complete an Annual Tax Performance Report by May 31st of the following calendar year. The following are eligible products:

(A) Timber extracted by the seller;

(B) Timber products manufactured by the seller from timber or other timber products;

(C) Wood products manufactured by the seller from timber or timber products; and

(D) Mass timber products, as defined in RCW 19.27.570(1), manufactured by the seller.

(iv) Small harvesters, as defined in RCW 84.33.035, are not required to complete an Annual Tax Performance Report with the department.

(f) Engaging in multiple activities. Persons who extract, manufacture, or both extract and manufacture the timber products they sell are engaged in multiple activities. Timber harvesters who are engaged in multiple activities are required to report their gross proceeds of sales under each applicable production B&O tax classification (extracting or manufacturing) and, under the appropriate selling B&O tax classification (wholesaling or retailing).

(g) Multiple activities tax credit (MATC). The MATC will apply in cases where a person sells products to Washington customers that they have also extracted and/or manufactured in Washington. For a detailed explanation of the MATC reporting requirements see WAC 458-20-19301.

Facts: ZYX Tree Company (ZYX) is in the business of manufacturing and selling wood siding products used in building construction. All of ZYX's products are manufactured by ZYX using timber that ZYX harvested. For the month of July 2023, ZYX had $100,000 in gross income from its sales of specialty wood siding products. All of the sales were made at wholesale and occurred in Washington.

Result: ZYX must report $100,000 in gross revenue under each of the following B&O tax classifications: Extracting timber, manufacturing of timber or wood products, and wholesaling of timber or wood products. Additionally, ZYX is eligible to claim the MATC. Because the preferential B&O tax rates are the same for all three of the classifications reported by ZYX, the MATC will fully offset both the extracting timber and manufacturing timber or wood products B&O tax liabilities. ZYX's tax liability after applying the MATC is $290.40 ($100,000 multiplied by the wholesaling of timber or wood products B&O tax rate of 0.2904 percent under RCW 82.04.260 (12)(c)). Note: An additional B&O tax surcharge imposed on those persons who are subject to any of the taxes imposed under RCW 82.04.260(12) may apply. See RCW 82.04.261 for more information.

(3) Extractors for hire. Persons performing extracting activities (labor or mechanical services) for timber harvesters as independent contractors for hire must report gross income from these activities under the extracting for hire B&O tax classification. RCW 82.04.280. Persons performing extracting for hire services for consumers must collect and remit retail sales tax on those services unless otherwise exempt by law. RCW 82.04.050(2).

Until July 1, 2045, persons who extract timber for hire are eligible for a preferential B&O tax rate for timber extracting for hire activities. RCW 82.04.260 (12)(a). Taxpayers reporting under the preferential extracting for hire timber B&O tax classification in the current year are required to complete an Annual Tax Performance Report by May 31st of the following year.

Extracting activities commonly performed by extractors for hire include, but are not limited to the following:

(a) Cutting or severing trees;

(b) Logging road construction or maintenance;

(c) Activities related to and performed on timber-producing property that are necessary and incidental to timber operations, such as:

(i) Slash cleanup and burning;

(ii) Scarification;

(iii) Stream and pond cleaning or rebuilding;

(iv) Restoration of logging roadways to a natural state;

(v) Restoration of wildlife habitat; and

(vi) Fire trail work.

Facts: Timber Harvester, a harvester and manufacturer, pays Tree Severing Corporation (TSC) $100,000 to fell trees owned by Timber Harvester.

Result: TSC is performing an extracting activity for hire. The $100,000 TSC receives is subject to B&O tax under the preferential extracting for hire timber classification. TSC must timely file an Annual Tax Performance Report as required under RCW 82.04.260(12). This transaction is not subject to retail sales tax because Timber Harvester is not the consumer of the extracted timber.

(4) Processors for hire. Persons that perform labor and mechanical services as independent contractors for timber harvesters upon property belonging to others, so that as a result a new, different, or useful article of tangible personal property is produced for sale or commercial or industrial use during the manufacturing portion of a timber harvest operation are subject to B&O tax under the processing for hire classification, measured by the gross income from those services. A processor for hire is any person who would be a manufacturer if that person were performing the labor and mechanical services upon his or her own materials. RCW 82.04.280 and WAC 458-20-136. Persons performing processing for hire services for consumers must collect and remit retail sales tax on the charges for those services unless otherwise exempt by law. RCW 82.04.050(2).

(a) For timber harvest operations, the manufacturing portion of the operation begins after the standing timber has been felled, cut (severed from the land), or taken if the felled trees are subsequently delimbed, measured, and bucked at the manufacturing (harvest) site. The subsequent activities of cutting, delimbing, and measuring of the felled, cut (severed from the land), or taken timber by third parties are considered processing for hire activities when performed at the site of the harvest.

(b) Until July 1, 2045, persons who process for hire (i) timber into timber products or wood products; (ii) timber products into other timber products or wood products; or (iii) mass timber products defined in RCW 19.27.570(1), are eligible to report their gross proceeds under the preferential processing for hire timber products B&O tax classification. RCW 82.04.260 (12)(b). Taxpayers claiming this B&O tax preference in the current year are required to complete an Annual Tax Performance Report by May 31st of the following year.

Facts: TTT Company (TTT), a harvester and a manufacturer, owns a parcel of land comprised of standing timber. TTT fells the timber on its own behalf. Subsequently, TTT pays Tree Services, Inc. (TSI) $300,000 to delimb, measure, and buck the severed trees at TTT's harvest site.

Result: TSI is a processor for hire. The $300,000 TSI received is subject to B&O tax under the preferential processing for hire timber products classification. TSI must timely file an Annual Tax Performance Report as required under RCW 82.04.260(12). This transaction is not subject to retail sales tax because TTT is not the consumer of the harvested timber, assuming TTT will resell the logs it extracted and manufactured.

Facts: With the same facts from Example 4, TTT pays Chopper Services Inc. (CS) $200,000 to transport severed timber by helicopter from the location within the harvest site where the timber was felled to a staging location where the severed timber can be delimbed, measured, and bucked (manufactured into logs) by TSI, prior to being loaded into trucks by TTT and transported to a mill for further processing.

Result: CS's provision of helicopter transportation services for transporting severed timber to a staging area within the manufacturing (harvest) site where the severed timber will be processed (measured, delimbed, and bucked) into logs are part of the manufacturing operation (which began after the timber was felled), and are themselves manufacturing activities. See RCW 82.08.02565 (2)(c)(ii). The $200,000 CS received from TTT is subject to B&O tax under the processing for hire timber products classification. CS must timely file an Annual Tax Performance Report as required under RCW 82.04.260(12).

(5) Log hauling activities. Persons performing services for timber harvesters are often required to haul logs by motor vehicle from the harvest site to separate locations, over public roads. The income attributable to this hauling activity is subject to PUT.

(a) Effective August 1, 2015, RCW 82.16.020 provides a reduced PUT rate for most log transportation businesses. A "log transportation business" means a business engaged in transporting logs by truck, except when the transportation meets the definition of urban transportation business or occurs exclusively on private roads. RCW 82.16.010. WAC 458-20-180 explains the distinction between motor and urban transportation. If the hauling is exclusively performed over private roads, the gross income from the transportation activity is subject to B&O tax under the service and other activities classification, not a PUT classification.

Facts: Bob's Logging Company (Bob's Logging) pays HHH Log Hauling Company (HHH) $4,000 to haul logs over private roads from Bob's harvest site to a transfer site located 10 miles away, where Bob's Logging will unload, sort, and reload the logs for further distribution. Separately, Bob's Logging pays JJJ Log Hauling Ltd (JJJ) $6,000 to haul logs from the transfer site to a mill located 30 miles away. JJJ will transport the logs over both private and public roads. The harvest site, transfer site, and mill site are all located in unincorporated parts of Mason County.

Result: HHH is subject to B&O tax under the service and other activities classification because the haul of the logs performed by HHH is exclusively on private roads. HHH must report $4,000 in gross income under the service and other activities B&O tax classification.

JJJ is subject to PUT under the motor transportation classification because the haul occurs on both private and public roads. JJJ must report $6,000 in gross income under the motor transportation PUT classification.

(b) Jointly provided hauling services. In cases where log hauling services are jointly provided by two or more motor carriers, the motor carrier that contracts with the purchaser of the hauling services may be eligible to claim a PUT deduction for amounts paid to third-party motor carriers that jointly furnish some portion (or all) of the haul. See WAC 458-20-179 and RCW 82.16.050 for more information on the PUT deduction for services furnished jointly.

Example 7. Hauling services jointly provided.

Facts: Assume the facts from Example 6, except that JJJ contracts with Bob's Logging to perform all necessary hauling services from the harvest site to the transfer site, then from the transfer site to the mill. The portion of the haul from the harvest site to the transfer site will be performed over private and public roads. JJJ receives $10,000 from Bob's Logging in exchange for the contracted services. After entering into the contract with Bob's Logging, JJJ enters into a contract with HHH, in which HHH will perform the first portion of the haul from the harvest site to the transfer site. HHH receives $4,000 from JJJ in exchange for its portion of the jointly provided services.

Result: JJJ must report $10,000 in gross income under the log hauling over public highways PUT classification. Additionally, JJJ may take a $4,000 deduction for "Amounts Paid to Another for Services Jointly Provided" from the amount reported.

HHH must report $4,000 in gross income under the log hauling over public highways PUT classification. HHH is not eligible for a deduction.

Facts: Assume the facts from Example 6, except that JJJ contracts with Bob's Logging to perform all necessary hauling services from the harvest site to the transfer site, then from the transfer site to the mill. The portion of the haul from the harvest site to the transfer site will be performed entirely over private roads. JJJ receives $10,000 from Bob's Logging in exchange for the contracted services. After entering into the contract with Bob's Logging, JJJ enters into a contract with HHH, in which HHH will perform the first portion of the haul from the harvest site to the transfer site. HHH receives $4,000 from JJJ in exchange for its portion of the jointly provided services.

Result: JJJ must report $10,000 in gross income under the log hauling over public highways PUT classification. JJJ may not claim a deduction for "Amount Paid to Another for Services Jointly Provided," as HHH's hauling services are not performed over a public road and are therefore not subject to PUT.

HHH must report $4,000 in gross income under the service and other activities B&O tax classification. HHH is not subject to PUT, as the log hauling services were provided entirely over private roads.

(c) Hauling logs using own equipment. In cases where a person hauls timber or wood products using their own equipment and has established hauling rates that they pay to third parties for comparable hauls, such rates may be used to establish the measure of tax for the person's hauling activity. Otherwise, the measure of the tax should be all costs attributable to the hauling activity including, but not limited to, the following costs relative to the hauling equipment: Depreciation; repair parts and repair labor; and wages and benefits for employees or compensation to contractors driving or maintaining the equipment. If appropriate records are not maintained to document these costs, the department will accept one-third of the gross income derived from a contract for all labor or mechanical services beginning with the cutting or severance of trees through the hauling services as the measure of the tax under the motor transportation or log hauling over public highways PUT classification.

(d) Deduction for hauls to export facilities. Refer to subsection (13) of this rule for information regarding the deduction available for certain log hauls to export facilities.

(6) Common timber sale arrangements. Persons who sell or take timber may be subject to various taxes including B&O tax, sales tax, use tax, timber excise tax, and REET. There are a number of ways in which harvesting activities are conducted and timber is sold. The timing of the transfer of ownership of, or the contractual right to sever, standing timber determines which taxes are due and who is liable for remitting tax.

(a) In general, when a timber sale arrangement meets the definition of "selling standing timber" as defined in RCW 82.04.260 (12)(d), the gross income is subject to B&O tax under chapter 82.04 RCW. Until July 1, 2045, persons engaging in "selling standing timber" are eligible to report gross receipts from sales of standing timber under the preferential B&O tax rate of 0.2904 percent in RCW 82.04.260 (12)(d). Persons claiming the preferential B&O tax rate in the current year must file a complete Annual Tax Performance Report with the department under RCW 82.32.534 by May 31st of the following year.

(b) RCW 82.45.195 provides a REET exemption for a sale of standing timber if the gross income from such sale is taxable under RCW 82.04.260 (12)(d); also see WAC 458-61A-113. However, when a sale of standing timber does not meet the definition of "selling standing timber" in RCW 82.04.260 (12)(d) or when a sale of standing timber is a sale, conveyance, or transfer of the ownership of or title to real property as defined in RCW 82.45.010 and WAC 458-61A-113, REET is due. "Real property" or "real estate" means any interest, estate, or beneficial interest in land or anything affixed to land, including an ownership interest or beneficial interest in any entity that owns land, or anything affixed to land, including standing timber or crops. WAC 458-61A-102(18). For more information on sales that are subject to REET, see chapters 82.45 RCW and 458-61A WAC.

(c) The following examples briefly identify two common types of timber sale arrangements. The examples are intended to provide general guidance only. The tax treatment of a particular timber sale arrangement depends on the facts and circumstances in each case. These examples presume that the trees being harvested are not Christmas trees, and that no participant is a federal, state, or local government entity. The examples do not detail the timber excise tax consequences.

Facts: ABC Company (ABC) owns a large tract of standing timber. ABC sells the right to cut the standing timber to XYZ Partnership (XYZ) for $100,000 on March 1, 2021. The sale agreement does not require XYZ to harvest (sever) the standing timber within 30 months from the date of the original contract. XYZ receives title to the timber from ABC prior to harvesting it. When the timber is ready for harvest on May 1, 2024, XYZ hires DEF Company (DEF) (third-party timber harvest contractor) to sever the timber on its behalf. XYZ pays DEF $50,000. After the timber is extracted, XYZ sells the harvested timber to UVW Company (an unrelated third-party Washington manufacturer) at wholesale for $250,000. UVW Company will measure, delimb, and buck the severed timber, then haul the logs from the harvest site to its own manufacturing facility, using its own trucks.

Result: ABC is not subject to B&O tax, PUT, or retail sales or use tax. ABC is liable for REET on the sale of standing timber to XYZ, because the transaction is a sale of real property. See RCW 82.45.010(1), 82.45.060, WAC 458-61A-102, and 458-61A-113. ABC is not liable for B&O tax, in this example, because the sale between ABC and XYZ does not meet the definition of "selling standing timber" in RCW 82.04.260 (12)(d). However, if the sale arrangement between ABC and XYZ were to require that XYZ sever or cut the timber within 30 months from the date of the original sale contract, ABC would then be subject to B&O tax on its proceeds from "selling standing timber" as defined in RCW 82.04.260(12), and the transaction would be exempt from REET in accordance with RCW 82.45.195.

XYZ (as the owner of the standing timber) must report $250,000 in gross income under the following B&O tax classifications: Extracting timber and wholesaling of timber or wood products. XYZ is eligible to claim the MATC equal to its extracting timber B&O tax liability. XYZ must timely file an Annual Tax Performance Report as required under RCW 82.04.260(12). XYZ is also subject to timber excise tax. See chapters 84.33 RCW and 458-40 WAC.

DEF must report $50,000 in gross income under the extracting for hire timber B&O tax classification and is not eligible for a credit or deduction. DEF must timely file an Annual Tax Performance Report as required under RCW 82.04.260(12).

Facts: Assume the facts from Example 9, except that ABC hires DEF to harvest the timber on ABC's behalf, rather than selling the standing timber to XYZ. ABC agrees to pay DEF $50,000 in exchange for DEF's harvesting and manufacturing (measuring, delimbing, and bucking of felled trees) services. After the timber has been severed, measured, delimbed, and bucked into logs by DEF, ABC sells the logs to GHI Lodge, Inc. (GHI) for $250,000. GHI is purchasing the logs to construct a new lodge (for GHI's own use) in unincorporated Skamania County (which is also the location of the harvest site).

Result: ABC (as the owner of the timber) must report $250,000 in gross income under the following B&O tax classifications: Extracting timber, manufacturing of timber products, and retailing. ABC is eligible to claim the MATC equal to its extracting timber B&O tax and manufacturing of timber products B&O tax liabilities. ABC must timely file an Annual Tax Performance Report as required under RCW 82.04.260(12). ABC is required to collect retail sales tax at the current combined state and local rate for unincorporated Skamania County. ABC is also subject to timber excise tax. See chapters 84.33 RCW and 458-40 WAC.

DEF must report $50,000 in gross income under the extracting for hire timber and processing for hire timber products B&O tax classifications. DEF must timely file an Annual Tax Performance Report as required under RCW 82.04.260(12). DEF is not eligible for the MATC.

(7) Equipment and supplies used in timber harvest operations. Retail sales tax applies to all retail sales of tangible personal property, including equipment, component parts of equipment, and supplies by persons engaging in timber operations unless a specific exemption applies. Purchases of fertilizer and spray materials (e.g., pesticides) for use in the cultivating of timber are also subject to retail sales tax, unless purchased for resale. If a seller fails to collect the retail sales tax, the buyer is required to remit what is commonly referred to as "deferred retail sales tax" directly to the department.

If a person acquires tangible personal property in a transaction that is not subject to retail sales tax, the person is subject to use tax based on the place of first use of the tangible personal property in Washington. In cases where a person has already paid a retail sales or use tax on the same tangible personal property to another state or foreign country (or political subdivision of either), that person may claim a credit for those taxes against their Washington use tax liability.

(a) Exemption available for certain manufacturing machinery and equipment. RCW 82.08.02565 and 82.12.02565 provide retail sales and use tax exemptions for certain machinery and equipment (M&E) used by manufacturers. Persons engaged in both extracting and manufacturing activities should refer to WAC 458-20-13601 for an explanation of how these exemptions may apply to them.

Facts: GHI LLC (GHI) is a timber harvester and a manufacturer, engaged in felling, delimbing, bucking, measuring, cutting, yarding, and loading logs at a logging operation site. GHI specializes in harvesting timber in remote locations with steep and challenging terrain. In performing its business activities, GHI uses a feller buncher to sever (cut) the standing timber. GHI also uses chainsaws to fell snags. After the trees are severed, GHI uses a yarder to create a cable yarding system to yard (transport or drag) the severed trees through the harvest unit to a staging area where they will be processed into logs and loaded onto trucks for transportation to an off-site mill. At the staging area, GHI uses a log processor to delimb, measure, and buck the trees, and a log loader to sort and stack the logs by species and length. The yarder, log processor, and the log loader are exclusively used by GHI as described in this example.

Result: For purposes of the retail sales and use tax exemptions in RCW 82.08.02565 and 82.12.02565, GHI may be eligible to claim an exemption for the yarder, log processor, and the log loader as (a) GHI is a manufacturer; (b) the manufacturing operation process has begun; (c) the three pieces of equipment are used directly in the manufacturing operation; (d) the three pieces of equipment are used a majority of the time in a qualifying manner; and (e) all other requirements under WAC 458-20-13601 are met (including the one year useful life requirement). In general, yarding (the process of transporting or dragging felled trees or logs to a landing area) as a standalone activity is not a manufacturing activity. Thus, whether yarding is a part of a manufacturing operation depends on whether such activity takes place at a manufacturing site. In this example, yarding occurs at the manufacturing (harvest) site.

GHI is not eligible to claim an exemption for the feller buncher or chainsaws as the majority use of both types of equipment are for extracting activities (cutting or severing trees from the land). Had the majority of use of the chainsaws and the feller buncher been for delimbing, measuring, and bucking the felled trees, both pieces of equipment may have been eligible for the M&E exemption if all the other requirements for the M&E exemption in WAC 458-20-13601 are satisfied.

Facts: Assume the facts from Example 11. In addition, GHI uses a bulldozer for a variety of purposes in its operations. The bulldozer is used exclusively to (a) support GHI's feller buncher in performing extracting activities (cutting or severing of timber); (b) support GHI's yarder in performing manufacturing activities upon the timber that has already been severed (yarding or transporting the severed trees to the staging area where the severed trees will be processed into logs and loaded onto trucks and transported to an off-site mill); and (c) clear debris and generally assist in the restoration of timber harvest sites. GHI does not separately state charges associated with its use of the bulldozer in its contracts with customers. GHI does maintain detailed time records that document the number of hours the bulldozer is used in the performance of each of the three activities. In its first year of use, the bulldozer was used to support the feller buncher for 200 hours, support the yarder for 400 hours, and clear debris and generally assist in harvest site restoration for 400 hours.

Result: While the use of the bulldozer to support the yarder for manufacturing activities is generally a qualifying use for purposes of the M&E exemption in RCW 82.08.02565 and 82.12.02565, the bulldozer is not eligible for the exemption because the majority of its use is for a nonqualifying purpose (supporting the feller buncher for extracting activities and clearing debris for harvest site restoration). In this case, the proper measure for determining majority use is time. A majority of the bulldozer's use, measured in time, was for nonmanufacturing activities (60 percent, or 600 of 1,000 hours used).

(b) Property manufactured for commercial use. A person who manufactures timber or wood products for commercial or industrial use is subject to B&O tax under the manufacturing of timber or wood products classification and use tax. Both taxes are imposed based on the value of the tangible personal property manufactured unless a specific exemption applies. WAC 458-20-134 defines and provides information on commercial or industrial use, and WAC 458-20-112 describes how to determine the value of products. If a person is also the harvester of the timber, the activity is subject to B&O tax under the extracting timber classification. The MATC will also apply, so long as both the extracting and manufacturing activities occur in Washington.

Facts: ABC Company (ABC) harvests timber, manufactures the timber into lumber, and then uses the lumber to construct an office building. The harvest site and manufacturing site are both located in unincorporated Clark County. The office building site is in Camas.

Result: ABC's use of the lumber to construct its office building is a commercial or industrial use. ABC is subject to use tax on the value of the lumber incorporated into the office building. Because ABC's first taxable use of the lumber occurred in Camas (the building construction site location), the combined state and local use tax is due based on the location code and rate assigned to the Camas address. ABC is also subject to B&O tax under the extracting timber and manufacturing of timber or wood products classifications and may claim the MATC.

(8) Seeds and seedlings. Persons who cultivate trees by agricultural methods (or tree cultivators) often purchase or collect tree seeds that are raised into tree seedlings. The activity of raising a seed into a seedling may be performed by the tree cultivator, or by third-party growers. In the case of third-party growers, typically the seed is provided by the tree cultivator and tree seedlings are received back after a specified growing period.

(a) Responsibility to remit retail sales or use tax. The purchase of seed or seedlings by a tree cultivator is subject to retail sales tax. If a seller fails to collect retail sales tax, the buyer must remitdeferred retail sales tax (or use tax) unless otherwise exempt by law. The use of seed collected by a tree cultivator is also subject to use tax.

(i) In the case of seed provided by a tree cultivator to a third-party grower in Washington, the tree cultivator incurs any use tax liability on the value of the seed.

(ii) In the case of seedlings brought into and used in Washington by a tree cultivator, the seedlings are subject to use tax, unless Washington retail sales or use tax was previously paid on the seedlings.

(b) Limited sales and use tax exemptions for conifer seeds.

(i) Exemption requirements. Retail sales and use tax do not apply to the sale of conifer seed that is immediately placed into freezer storage operated by the seller and is: (A) Used for growing timber outside Washington or (B) sold to an Indian tribe or tribal member and is to be used for growing timber in the tribe's or tribal member's Indian country. For the purposes of this rule, "Indian country" is defined as set forth in 18 U.S.C. Sec. 1151. See RCW 82.24.010.

The buyer must provide the seller with an exemption certificate in a form and manner prescribed by the department at the time of purchase. The seller must retain a copy of the buyer's exemption certificate. RCW 82.32.070 requires taxpayers to keep and preserve suitable records as may be necessary to determine the amount of any tax collected by the department for a period of five years.

(ii) Deferring payment of retail sales tax if unable to determine whether purchase qualifies for the retail sales tax exemption. If a buyer of conifer seed is normally engaged in growing timber both within and outside Washington and is not able to determine at the time of purchase whether the seed acquired, or the seedlings germinated from the seed acquired, will be used for growing timber within or outside Washington, the buyer may defer payment of the retail sales tax until it is determined that the seed, or seedlings germinated from the seed, will be planted for growing timber in Washington. A buyer that does not pay retail sales tax on the purchase of conifer seed and subsequently determines that the sale did not qualify for the retail sales tax exemption must remit to the department the amount of retail sales tax that would have been paid at the time of purchase. It is important to note that the retail sales tax liability may be deferred only if the seller immediately places the conifer seed into freezer storage operated by the seller.

(iii) Tax paid at source deduction. A buyer who pays retail sales tax on the purchase of conifer seed and subsequently determines that the sale qualifies for the tax paid at source deduction may claim a deduction on its combined excise tax return. The deduction is allowed only if the buyer keeps and preserves records identifying the seller, purchase date, purchase amount, and retail sales tax paid. RCW 82.32.070 requires suitable records must be kept and preserved for a period of five years. See WAC 458-20-102 for more information on the tax paid at source deduction.

(iv) Use tax exemption. Use tax does not apply to the use of conifer seed to grow seedlings if the seedlings are grown by a person other than the owner of the seed. This exemption applies only if the seedlings will be used for growing timber outside Washington, or if the owner of the conifer seed is an Indian tribe or tribal member and the seedlings will be used for growing timber in the tribe's or tribal member's Indian country. If the owner of the conifer seed is not able to determine at the time the seed is used in a growing process whether the use of the seed qualifies for this exemption, the owner may defer payment of the use tax until it is determined that the seedlings will be planted for growing timber in Washington.

(9) Activities or income incidental to timber harvest operations. This subsection addresses the tax consequences of various business activities that are incidental to timber harvest operations.

(a) Taking other natural products from timberland. The value of natural products such as boughs, mushrooms, seeds, and cones taken for sale or commercial or industrial use is subject to B&O tax under the extracting classification. Sales of these products are subject to B&O tax under the wholesaling or retailing classification, as the case may be. Persons who extract natural products in Washington and subsequently sell those products to customers that receive the products in Washington are eligible for the MATC. Sales of natural products to consumers that are sourced to Washington are subject to retail sales tax unless a specific exemption applies.

(b) Timber cruising, scaling, and access fees. Gross income from timber cruising, scaling services, and allowing others to use private roads is subject to B&O tax under the service and other activities classification. Gross income from access fees for activities such as hunting, taking firewood, bough cutting, mushroom picking, or grazing is also subject to B&O tax under the service and other activities classification. Charges that allow a person to take an identified quantity of tangible personal property from privately owned real property are considered sales of that property, and the gross income received from these charges is subject to B&O tax under the retailing or wholesaling classification, as the case may be. These charges are also subject to retail sales tax when made to a consumer and the sale is sourced to Washington, unless a specific exemption applies.

(c) Planting, thinning, and spraying. Sales of the following services are subject to B&O tax under the service and other activities classification: Planting trees or other vegetation; precommercial thinning; and spraying or applying fertilizers, pesticides, or herbicides.

(d) Sales of firewood and Christmas trees. Sales of firewood, Christmas trees, and other tangible personal property are generally subject to either the wholesaling B&O tax, or the retailing B&O tax and retail sales tax, as the case may be. These sales are often made in the nature of charges that allow the buyer to select and take an identified quantity of the property (e.g., six cords of firewood or two Christmas trees). Sales of commercially traded firewood or naturally grown trees (including Christmas trees) are also subject to timber excise tax; see WAC 458-40-610 and 458-40-660. For activities related to plantation (cultivated) Christmas trees, see subsection (10) of this rule and WAC 458-20-210.

(e) Unloading logs from logging trucks. The taxability of gross income received by persons operating equipment to unload logs from logging trucks onto rail cars at transfer points depends on the nature of the customer's activities.

(i) In cases where the customer will direct the operator of the equipment as to where and how to move the logs, the activity is considered a "rental of equipment with an operator," the charges for which are subject to retailing B&O tax and retail sales tax. See RCW 82.04.050(9) and WAC 458-20-211.

(ii) In cases where the equipment operator is responsible for loading and unloading logs at their own discretion and to contract specification, the activity is considered an "other support service," and the charges for which are subject to B&O tax under the service and other activities classification.

(iii) In cases where the equipment operator is responsible for loading and unloading logs at their own discretion and to contract specification, and where the activities are performed at an export facility as part of a waterborne export activity, the activity is considered "stevedoring," the charges for which are subject to B&O tax under the stevedoring classification. See WAC 458-20-193D.

(f) Transporting logs by water. Gross income received for transporting logs by water (e.g., log booming and rafting) or from log patrols is subject to PUT under the other public service business

classification. Commonly, log transporters use "boomsticks" (i.e., floating logs chained together in a rough hexagonal shape, which are designed to prevent log bundles or loose logs from escaping the log boom during towing) to assist in the transportation of logs over water.

(i) In cases where boomsticks are used in the transportation of logs, any separate or itemized charges for the use of boomsticks are included in the taxable measure subject to the other public service business PUT classification.

(ii) In cases where logs will be towed to a location specified by the customer for storage, separately stated or itemized charges for the use of boomsticks, while the logs are stored, are rentals of tangible personal property and are subject to B&O tax under the retailing classification and retail sales tax.

(g) Export sorting yard operations. Export sorting yard operations generally consist of a number of distinct business activities including, but not limited to, weighing, tagging, banding, appraising, and sorting of logs. Other incidental activities include debarking, removing imperfections (such as crooks, knots, splits, and seams), and trimming of log ends to remove defects. Gross income received by persons performing the types of export sorting yard activities described in this subsection is subject to B&O tax under the service and other activities classification.

(10) Harvesting Christmas trees. As described below, persons growing, producing, or harvesting Christmas trees are either farmers or extractors, depending on the facts and circumstances in each case.

(a) Plantation Christmas tree operations (farming operations). Persons growing or producing plantation Christmas trees on their own lands or on lands in which they have a present right of possession are farmers. See RCW 82.04.213 and WAC 458-20-210 for more information on farmers. Plantation Christmas trees are Christmas trees that are exempt from the timber excise tax under RCW 84.33.170, which requires that the Christmas trees be grown on land prepared by intensive cultivation and tilling, such as irrigating, plowing, or turning over the soil, and on which all unwanted plant growth is controlled continuously for the exclusive purpose of raising Christmas trees. See RCW 82.04.035 and 84.33.035.

(i) Gross income from wholesale sales of plantation Christmas trees by farmers is exempt from B&O tax. See RCW 82.04.330. Gross income from retail sales of plantation Christmas trees by farmers is subject to B&O tax under the retailing classification and retail sales tax.

(ii) Farmers growing or producing plantation Christmas trees are not subject to retail sales or use tax on their purchase of seed, seedlings, fertilizer, and spray materials. See RCW 82.04.050 and WAC 458-20-210.

(iii) Persons performing cultivation or harvesting services for farmers are generally taxable on gross income from these services under the service and other activities B&O tax classification. See WAC 458-20-209 for information on farming for hire and horticultural services performed for farmers.

(b) Other Christmas tree operations (extracting operations). Persons who, either directly or by contracting with others for the necessary labor or mechanical services, fell, cut, or take Christmas trees other than plantation Christmas trees are extractors and should refer to the provisions in this rule for timber harvesters.

(11) Timber harvest operations in conjunction with other land clearing or construction activities. Persons sometimes engage in timber harvest operations in conjunction with land clearing or construction activities, such as clearing or improving land for residential or commercial building development, golf courses, parks, or other improvements to real property. Each activity has its own tax consequences and may be subject to tax under a variety of taxes.

(a) Income derived from a timber harvest operation is subject to the provisions in this rule for timber harvesters.

(b) Income derived from clearing or improving of land for construction of residential, commercial, or other improvements is subject to wholesaling B&O tax, retailing B&O tax and retail sales tax, or public road construction B&O tax, as the case may be. Refer to WAC 458-20-170, 458-20-171, and 458-20-172 for tax-reporting information regarding these construction activities. Persons performing landscape and horticultural services such as cutting or trimming trees after the land is developed should refer to WAC 458-20-226.

Facts: LCG Land Clearing and Grading Company (LCG) is hired by FFF Corporation (FFF), a commercial property development company, to clear and grade an unimproved parcel of land owned by FFF. Once cleared and graded, FFF intends to construct a commercial warehouse on the property, which it will lease to third-party tenants. The property contains a significant amount of standing timber, which LCG is responsible for extracting and selling the extracted timber on FFF's behalf under the terms of the contract. The contract between FFF and LCG includes a $25,000 charge for the timber extraction services and a $75,000 charge for the land clearing and grading services. LCG hires a subcontractor, HHH Logging Company (HHH) to extract the timber from the property. LCG pays HHH $20,000 for its services. FFF ultimately sells the extracted timber to JJ Mill Company (JJ) for $30,000 at wholesale.

Result: LCG is an extractor for hire with respect to the $25,000 in proceeds from FFF for the harvest of the standing timber. The gross income is subject to B&O tax under the extracting for hire timber classification. LCG is also subject to B&O tax under the retailing classification and must collect retail sales tax from FFF on the $75,000 in proceeds for the clearing and grading of the real property.

HHH is an extractor for hire with respect to the $20,000 in proceeds from LCG for the harvest of the standing timber. The gross income is subject to B&O tax under the extracting for hire timber classification.

FFF is an extractor with respect to the sale of the harvested timber to JJ. FFF must report $30,000 in gross income under the extracting timber and wholesaling of timber or wood products B&O tax classifications. FFF may also be eligible for the MATC, if the sale to JJ occurred in Washington.

(12) Logging road construction and maintenance. Constructing or maintaining logging roads (whether active or inactive) is considered an extracting activity. Income derived from this activity is subject to B&O tax under the extracting or extracting for hire classification. This income is not subject to retail sales tax. A person constructing or maintaining a logging road is a consumer of all materials incorporated into the logging road. The purchase or use of these materials is subject to either retail sales or use tax.

(a) Logging road materials provided without charge.

(i) Landowners or timber harvesters may provide materials (e.g., crushed rock) to persons constructing or maintaining logging roads without charge. In such cases, tax is due only once on the value of the materials.

(ii) The person constructing or maintaining the roads is responsible for remitting use tax on the value of the materials, unless the person documents that the landowner or timber harvester previously remitted the appropriate retail sales or use tax.

Alternatively, the person may take a written statement from the landowner or timber harvester certifying that the landowner or timber harvester has remitted (for past periods) or will remit (for future periods) all applicable retail sales or use taxes due on materials provided without charge. This statement must identify the period of time, not to exceed four years, for which the agreement is effective. The statement must identify the landowner or timber harvester's tax registration number and must be signed by an owner, member, or authorized agent of the timber harvester.

(b) Extracted or manufactured logging road materials. Persons constructing or maintaining logging roads are subject to B&O tax and use tax on the value of applied materials they extract or manufacture from private pits, quarries, or other locations. The measure of tax is the value of the extracted or manufactured products. See WAC 458-20-112 for additional information regarding how to determine the "value of products."

(i) If a person directly, or by contracting with others, extracts and crushes, washes, screens, or blends materials to be incorporated into the logging road, B&O tax under the extracting classification is due on the raw value of the extracted products. B&O tax under the manufacturing classification and use tax are also due, measured by the value of the manufactured product. If the "cost basis" is the appropriate method for determining the value of products under WAC 458-20-112, this value includes the cost of transportation to a processing point but does not include any transportation from a processing point to a road site. The MATC may be taken when computing the B&O tax as explained in WAC 458-20-19301.

(ii) In the case of fill dirt, sand, gravel, or rock that is extracted from a location away from a logging road site, but not further processed, extracting B&O tax and use tax are due based upon the value of the extracted product. If the "cost of production basis" is the appropriate method for determining the value of products under WAC 458-20-112, this value does not include transportation costs to a road site.

(iii) The mere severance of fill dirt, sand, gravel, or rock from outcroppings at the side of a logging road for placement in the road is a part of the logging road construction or maintenance activity. The person incorporating these materials into the road does not incur a tax liability for the extracting or use of these materials.

(13) Deduction for hauling logs to export yards. RCW 82.16.050 provides a PUT deduction for amounts derived from the transportation of commodities from points of origin within this state to an export elevator, wharf, dock, or shipside ("export facility") on tidewater or navigable tributaries of tidewaters. The commodities must be forwarded from the facility, without intervening transportation, by vessel and in their original form, to an interstate or foreign destination. No deduction is allowed when the point of origin and the point of delivery are located within the corporate limits of the same city or town.

(a) Conditions for deduction. This deduction is available only to the person making the last haul, not including hauls within the export facility before the logs are placed on the ship. This deduction is not available if the haul starts in the same city or town where the export facility is located.

The deduction is available only if both of the following criteria are met:

(i) The logs eventually go by vessel to another state or country; and

(ii) The form of the logs does not change between the time the logs are delivered to the export facility and the time the logs are placed on the ship. The mere removal of bark from the logs (debarking) or the incidental removal of imperfections (see subsection (9)(g), of this rule) while the logs are at the export facility is not itself a manufacturing activity, nor does it result in a change in the "original form" of the logs as contemplated by RCW 82.16.050.

(b) Documentation requirements for deduction. The log hauler must prove entitlement to the deduction. Delivery tickets that show delivery to an export facility are not, alone, sufficient proof. A certificate from the export facility operator is acceptable additional proof if it is substantially in the following form. Rather than a certificate covering each haul, a "blanket certificate" may be used for a one-year period if no significant changes in operation will occur within this period of time.

(c) Examples. For Examples 16 through 18, presume that the logs are shipped directly to another country from the export facility.

Facts: MMM Hauling Company (MMM) is hired to haul logs from a harvest site to an export facility over public roads. The logs will immediately be loaded upon a ship for export at the export facility. As part of its services, MMM will remove bark from 50 percent of the logs; no other processing activities will occur. MMM receives $10,000 in exchange for its services.

Result: MMM must report $10,000 in gross income under the log hauling over public highways PUT classification. MMM may also claim a $10,000 deduction from the measure of its PUT, as the logs will be shipped directly to another country from the export facility, provided the appropriate exemption certificate is obtained.

NOTE: Because the mere removal of bark is not considered a change in the form of the logs, the export facility may provide a certificate in the above form indicating that all logs at this facility will ultimately be shipped to another country.

Additionally, this means that MMM is not engaged in a processing for hire activity.

Facts: Assume the facts from Example 16, except that MMM hauls the logs to an export sorting area, approximately one mile from the export facility. At this location further sorting takes place and 80 percent of the logs are hauled approximately one mile over public roads for export to another country. The other 20 percent of the logs are sold and delivered to local sawmills.

Result: MMM must report $10,000 in gross income under the log hauling over public highways PUT classification. MMM may not claim a deduction from the measure of its PUT, as the logs will not be shipped directly to another country from the export facility. It is immaterial that MMM may be paid an "export" rate for its services.

Charges for the haul of the logs from the export sorting area to the export facility may be deductible if the transportation route does not start and end within the corporate limits of the same city or town, and the hauler obtains the appropriate exemption certificate. The haul to the local sawmills is not deductible.

Facts: Assume the facts from Example 16, except that once the logs are delivered by MMM to an export facility, the logs will still need to be transported approximately half of a mile to reach the ship for loading (all within the export facility).

Result: MMM must report $10,000 in gross income under the log hauling over public highways PUT classification. MMM may also claim a $10,000 deduction from the measure of its PUT, as the logs will be shipped directly to another country from the export facility, provided the appropriate exemption certificate is obtained. Movement of the logs within the export facility is not an intervening haul.

(14) Small timber harvesters - Business and occupation tax exemption. RCW 82.04.333 provides a limited exemption from B&O tax for small harvesters. A small harvester may take a deduction for an amount not to exceed $100,000 per tax year from the gross receipts or value of products proceeding or accruing from timber harvested. A deduction may not reduce the amount of tax due to less than zero.

(a) Definition of small harvester. "Small harvester" means every person, who from his or her own land or from the land of another under a right or license granted by lease or contract, either directly or by contracting with others for the necessary labor or mechanical services, fells, cuts, or takes timber for sale or for commercial or industrial use in an amount not exceeding 2,000,000 board feet in a calendar year. When a government entity (i.e., the United States or any instrumentality thereof, the state, including its departments and institutions and political subdivisions, or any municipal corporation therein) fells, cuts, or takes timber for sale or for commercial or industrial use, not exceeding these amounts, the small harvester is the first person other than the government entity who acquires title to or a possessory interest in the timber. "Small harvester" does not include persons performing under contract the necessary labor or mechanical services for a harvester, and it does not include the harvesters of Christmas trees or short-rotation hardwoods. RCW 84.33.035.

(b) Registration - Tax return. A person whose only business activity is as a small harvester of timber is required to register with the department for B&O tax purposes, unless otherwise specified in WAC 458-20-101 (2)(a) or under chapter 82.32 RCW. A small harvester must also register with the forest tax program in the department's audit division for payment of the timber excise tax. See chapters 84.33 RCW and 458-40 WAC for more information regarding the timber excise tax.

(c) Examples. In each of the following examples, the harvester must register with the department's forest tax program for the payment of timber excise tax, and must report under the appropriate tax classifications as described above in this rule.

Facts: A small harvester, not currently registered with the department for B&O tax purposes, harvests timber in June 2023 and again in August 2023, receiving $10,000 for the June 2023 sale and $200,000 for the August 2023 sale of the harvested logs. Each sale is made to a lumber mill who presents the small harvester with a reseller permit.

Result: The small harvester must register with the department in August when the receipts from the timber harvesting business exceed the gross revenue threshold in WAC 458-20-101, assuming the other registration conditions in that rule have not otherwise been met prior to August.

An excise tax return must be filed according to the tax reporting frequency assigned by the department (e.g., monthly, quarterly, or annually). The small harvester must report $210,000 in gross revenue under extracting timber, manufacturing of timber or wood products, and wholesaling of timber or wood products B&O tax classifications. The small harvester taxpayer is eligible to report a $100,000 "small harvester" B&O tax deduction from the measure of all three B&O tax classifications. In addition, the taxpayer is eligible to take the MATC for both the extracting timber and manufacturing of timber or wood products. As a result, the wholesaling of timber or wood products B&O tax is due.

Facts: RRR Construction Company (RRR) is primarily in the business of commercial building construction and is currently registered with the department. In July 2023, RRR generates $250,000 in gross wholesaling income from its construction activities. RRR is also a small harvester as defined in RCW 84.33.035. RRR's timber harvesting operation includes extracting standing timber from its own land and processing the extracted timber into logs before wholesaling the logs to third-party mills. In July 2023, RRR receives $60,000 from the sale of logs from its timber harvesting operation to a local mill for resale. Year to date, RRR has not had any other sales of harvested timber or wood products.

Results: RRR is required to report $250,000 in gross revenue under the wholesaling B&O tax classification for its construction activities.

RRR (as a smaller harvester and a manufacturer) is required to report $60,000 in proceeds from the sale of logs under three B&O tax classifications: Extracting timber, manufacturing of timber or wood products, and wholesaling of timber or wood products. RRR is eligible for a $60,000 "small harvester" B&O tax deduction from all three B&O tax classifications. RRR is eligible for additional "small harvester" B&O tax deductions up to $40,000 ($100,000-$60,000) for the remainder of the reporting calendar year.

Facts: Don Janson, a small harvester not otherwise registered with the department for B&O tax purposes contracts with NNN Logging Company (NNN) to extract standing timber from real property owned by Mr. Janson and process the extracted timber into logs. Mr. Janson retains ownership of the timber until it is sold. Under the agreement, Mr. Janson receives 60 percent and the logging company receives 40 percent of the log sale proceeds.

In September 2021, the harvested timber is sold at wholesale for $250,000, $150,000 (60 percent of $250,000) of which is received by Mr. Janson.

Result: Mr. Janson (as a smaller harvester and a manufacturer) is required to register with the department for B&O tax purposes and must report the entire $250,000 in sales proceeds under the following B&O tax classifications: Extracting timber, manufacturing of timber or wood products, and wholesaling of timber or wood products. Mr. Janson is not allowed to deduct the $100,000 (40 percent of $250,000) Mr. Janson paid to NNN. However, Mr. Janson is eligible to take a $100,000 "small harvester" B&O tax deduction from the measure of the B&O tax classifications reported, reducing the B&O taxable income to $150,000. Assuming the sale occurred in Washington, Mr. Janson is also eligible to claim the MATC for both the extracting timber and manufacturing of timber or wood products. Mr. Janson is subject to B&O tax under the wholesaling of timber or wood products classification.

NNN (as a logging contractor for Mr. Janson) must report the $100,000 gross income received from its extracting standing timber and processing for hire activities under the following B&O tax classifications: Extracting for hire timber and processing for hire timber products. NNN may also be subject to other taxes, depending on the activities NNN conducted.