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AGO 1968 No. 5 - February 05, 1968
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John J. O'Connell | 1957-1968 | Attorney General of Washington


TAXATION - ASSESSMENT OF PROPERTY - PERSONAL PROPERTY TAX EXEMPTION - GOODS IN TRANSIT.

The provisions of RCW 84.36.171-84.36.174, relating to the "free port" exemption from property taxation, do not permit the exemption to be obtained through use of a formula whereby the total volume of tax exempt in-transit property would be regarded to be a certain percentage of the taxpayer's total year-end inventory which percentage would be computed by multiplying the percentage of total purchases which were received by the taxpayer from out-of-state sources during the year by the percentage of total sales which were shipped by him to out-of-state purchasers during the same year.

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                                                                 February 5, 1968

Honorable Dwight S. Hawley
State Representative
44th District
3310 N.W. 80th Street
Seattle, Washington 98107

                                                                                                                   Cite as:  AGO 1968 No. 5

Dear Sir:

            By a previously acknowledged letter you have requested our opinion on a question which we paraphrase as follows:

            Where in-transit items of personal property are too numerous to be specifically identified and described in an affidavit of exemption filed pursuant to RCW 84.36.172, may the "free port" exemption from property taxation provided for by RCW 84.36.171-84.36.174 instead be obtained through use of a formula whereby the total volume of tax exempt in-transit property would be regarded to be a certain percentage of the taxpayer's total year-end inventory which percentage would be computed by multiplying the percentage of total purchases which were received by the taxpayer from out-of-state sources during the year by the percentage of total sales which were shipped by him to out-of-state purchasers during the same year?

            We answer this question in the negative for the reasons set forth in our analysis.

             [[Orig. Op. Page 2]]

                                                                     ANALYSIS

            In your letter, you have described the formula for computing the total volume of in-transit property, under the circumstances to which you have alluded, as follows:

            "a) The amount of purchases received from suppliers outside the state during the year is divided by total purchases during the year; the resulting figure is then multiplied by a fraction determined by dividing the amount of sales shipped to customers outside the state (primarily to customers in the State of Alaska) during the year by total sales during the year.

            "b) The percentage determined in (a) above is then applied to the full inventory value as of the last day of the calendar year to arrive at the deduction for freeport or in-transit property claimed as exempt from property taxation."1/

             The statutes relating to tax exemption of in-transit property are codified as RCW 84.36.171-84.36.174.  RCW 84.36.171 sets forth the basic statutory scheme for the exemption as follows:

            "Goods, wares, raw furs and merchandise manufactured or produced in any of the states, territories, or possessions of the United States or foreign countries and brought into this state for the purpose of transportation or sale through and to points without the state, and identified at the time the affidavit is filed as property ultimately destined for out-of-state shipment, while being so transported, or while held in storage in a public or private warehouse awaiting such transportation, shall be considered and held to be property in transit and nontaxable if actually shipped to points outside the state.  All such  [[Orig. Op. Page 3]] goods, wares and merchandise shall be listed and assessed as of January 1st of each year, without regard to any average inventory, but the assessor shall cancel any such assessment in whole or in proportionate part upon receipt of the affidavit of exemption as set forth in RCW 84.36.172.  A sale of or transfer of title to any such property, while being so transported or held in storage, shall not operate to defeat the intent or purpose of this section."  (Emphasis supplied)

            RCW 84.36.172 provides the method for making the claim of exemption, and states the time requirements for shipping the goods out of the state:

            "Any owner or agent claiming property in transit as defined in RCW 84.36.171 as of January 1st of any year shall file with his listing of property as provided by RCW 84.40.040 an affidavit of exemption in such form and manner as prescribed by the state tax commission which shall adequately describe the nature and amount of such property.  Such property for which an exemption is sought must be shipped to an out-of-state destination not later than December 31st of the year for which the exemption is claimed."  (Emphasis supplied)

            RCW 84.36.173 expresses the consequences if the goods are not shipped out by the statutory deadline contained in RCW 84.36.172, as follows:

            "If any property claimed to be tax exempt as property in transit as defined in RCW 84.36.171 is reconsigned to a final destination in the state of Washington or is not shipped out of the state by December 31st the owner or agent shall file a report not later than March 31st of the following year with the county assessor of the county in which the goods were located.  Such report shall be on a form prescribed by the state tax commission.  For each year the property would have been taxed, except for the provisions of RCW 84.36.171 through 84.36.174, all such properties so reconsigned or not shipped out of the state by December 31st shall be assessed and taxed as otherwise provided by law, including (but not limited to) assessments as omitted property pursuant to RCW 84.40.080:  Provided,  [[Orig. Op. Page 4]] That the three year limitations granted other omitted property shall not apply to property in transit reconsigned for delivery in the state of Washington.  Such property shall be subject to taxation for any year during which they were held as exempt property within the state prior to their delivery to some point in the state:  Provided further, That any property first declared to be exempt as in transit and later reconsigned for delivery within the state shall be subject to a penalty equal to eight percent of the tax found to be payable on such property during the period it was declared as exempt."

            Lastly, RCW 84.36.174 sets out record-keeping requirements, and the right of the assessor to inspect records, as follows:

            "All property claimed to be property in transit under RCW 84.36.171 shall be so designated upon the books and records of the owner or agent, or if the owner or agent maintains no records within this state, then upon the records of the warehouse or other person or agency having custody of such property in this state.  An owner or agent filing an affidavit of exemption under RCW 84.36.171 through 84.36.174 shall consent to the inspection of his books and records upon which the claimed property has been designated, such inspection to be similar in manner to that provided by RCW 84.40.340, or if the owner or agent does not maintain records within the state, the consent shall apply to the records of the warehouse, person or agent having custody of the property in this state.  Consent to the inspection of the records shall be executed as a part of the affidavit of exemption.  The owner, his agent, warehouseman or other person having custody of the property referred to herein shall retain within this state for a period of at least two years from the date of the affidavit of exemption a copy of the records showing shipment of such property to a destination outside this state.  If adequate records are not made available to the assessor within the county wherein the exemption is sought then the exemption shall be denied."

             [[Orig. Op. Page 5]]

            The scope of the in-transit property tax exemption was most recently considered by this office in AGO 65-66 No. 25, in which we said:

            ". . . it should be pointed out that the exemption will apply only when it is shown that the specific goods listed in the affidavit were the identical goods which were later shipped out-of-state.  Under RCW 84.36.171 the property must be '. . . identified at the time the affidavit is filed as property ultimately destined for out-of-state shipment . . .' and RCW 84.36.172 provides that '. . . Such property for which an exemption is sought must be shipped to an out-of-state destination . . .'  'Such property,' in our opinion, means such specific property or identical property."

            Upon reexamination, we feel that this previous determination, which for all practical purposes answers your question, is correct.  However, because of what we understand to be the great statewide interest in this problem, further discussion appears to be merited.

            First, the legislative history of the present "free port" exemption should be examined.  This exemption was first proposed as a senate amendment to Senate Bill 54 of the 1963 Extraordinary Session.  This senate amendment consisted of adding four sections to the bill.  The first amendatory section was a proposed amendment to RCW 84.36.171 the "free port" exemption provision as previously enacted by the 1961 legislature.  See, § 3, chapter 168, Laws of 1961.  This amendment was adopted by the senate, but was further amended by the house of representatives so as to cause the section to read in material part as above set forth in RCW 84.36.171, supra.  The remaining three amendatory sections were enacted as proposed, and embodied the exact language now found in RCW 84.36.172-84.36.174, supra.

            RCW 84.36.171,prior to the 1963 legislative amendment, read as follows:

            "Goods, wares, raw furs, and merchandise manufactured or produced in any of the states, territories, or possessions of the United States or foreign countries and brought into this state for the purpose of transportation or sale through and to points without the state, while being so  [[Orig. Op. Page 6]] transported, or while held in storage in a public or private warehouse awaiting such transportation, shall be considered and held to be property in transit and nontaxable if actually shipped to points outside the state on or before April 30th of the first year for which they would otherwise be taxable.  The county assessor shall list and assess all such goods, wares, and merchandise as of January 1st of each year, without regard to any average inventory, but shall cancel any such assessment in whole or in proportionate part upon receipt of sufficient documentary proof that the identical property so assessed was actually shipped to points outside the state on or before April 30th of such year; but no such cancellation shall be made unless proof is furnished to the county assessor before June 1st of such year.  A sale of or transfer of title to any such property, while being so transported or held in storage, shall not operate to defeat the intent or purpose of this section."

            The 1963 senate amendment to this provision, which we have cast in bill drafting style for ease of comparison, read as follows:

            "Goods, wares, raw furs and merchandise manufactured or produced in any of the states, territories, or possessions of the United States or foreign countries and brought into this state for the purpose of transportation or sale through and to points without the state, and identified and set aside at the date of such entry as property ultimately destined for out-of-state shipment, while being so transported, or while held in storage in a public or private warehouse awaiting such transportation, shall be considered and held to be property, in transit and nontaxable if actually shipped to points outside the state ((on or before April 30th of the first year for which they would otherwise be taxable)).  The county assessor shall list and assess all such goods, wares and merchandise as of January 1st of each year, without regard to any average inventory, but shall cancel any such assessment in whole or in proportionate part upon receipt of  [[Orig. Op. Page 7]] ((sufficient documentary proof that the identical property so assessed was actually shipped to points outside the state on or before April 30th of such year, but no such cancellation shall be made unless proof is furnished to the county assessor before June 1st of such year))the affidavit of exemption as set forth in section 2 of this amendatory act.  A sale of or transfer of title to any such property while being so transported or held in storage, shall not operate to defeat the intent or purpose of this section."2/

             Thereupon, as we have said, when the bill reached the house, there was a further amendment to the senate amendment.  The phrase "and set aside at the date of such entry" was stricken and the phrase "at the time the affidavit is filed" was substituted.3/ With concurrence in this house amendment by the senate, the present free port exemption was enacted into law.

            Two things should be noted concerning this legislative history.  RCW 84.36.171, prior to the amendment in 1963, made it clear that the limited free port exemption given by that section would apply only if the "identical property so assessed was actually shipped to points outside the state."  Thus, under this exemption, the percentage method of computation described in your letter would have been unauthorized, and identification of specific goods would have been required.  Although this language was stricken by the senate amendment in 1963, this amendment at the same time added a requirement that the exempt goods must be "identified and set aside at the date of such entry as property ultimately destined for out-of-state shipment."  This language hardly would have allowed the use of a percentage method of computation, as outlined in your letter.  This senate amendment would have required not only identification of specific goods, but actual physicalsegregation of these goods.

            The latter requirement of physical segregation was, of course, deleted in the house.  This deletion was apparently made in recognition of the obvious fact that identification of specific goods often can be made without physical segregation; e.g., through use of lot numbers, carton coding, etc.  However, it seems clear that the elimination of this segregation requirement in no way eliminated theidentification requirement.

             [[Orig. Op. Page 8]]

            In short, this legislative history in no way indicates that the requirement of identification of specific goods contained in the original version of RCW 84.36.171 was intended to be eliminated by the 1963 amendment.  The requirement was simply cast in somewhat different, though very similar, terms.

            Over and above this legislative history, a second point should be noted; i.e., the consequences of allowing the use of the proposed formula method, rather than a strict identification method.  Assume that a given taxpayer purchases half of his total inventory from out-of-state sources, and sells half of his total inventory to out-of-state buyers.  Under the formula proposed in your letter, only twenty-five percent of the year-end inventory would be considered as exempt free port goods.  (.5 times .5 equals .25.)

            Use of this formula would reach a correct result if in fact half of the goods shipped to out-of-state buyers were obtained from out-of-state sources.  More generally, use of a formula of this type would reach a correct result of the part of the inventory shipped to out-of-state buyers were derived from both in-state and out-of-state sources in exactly the same proportions as the total inventory.  Of course, with respect to any given taxpayer, this could conceivably be the case.  However, under the formula method proposed, and without identification of specific goods, it would be impossible to determine whether or not such was actually the case with respect to the particular taxpayer claiming the exemption.

            Use of the proposed formula method, in short, could be justified only by arbitrarily making the assumption that the part of the inventory shipped to out-of-state buyers was derived in the exact same proportions from both in-state and out-of-state sources as the total inventory.  However, we find nothing in the statute which expressly or impliedly would allow a taxpayer to compute the free port exemption simply on the basis of this assumption, which in any given case would more likely be incorrect than correct.

            We are aware of the practical difficulties which this conclusion may entail.  For many taxpayers, the expense of keeping necessary records may be such as to make claiming the free port exemption impractical.  We are also aware that other states have recognized this problem, but they have solved it by specific provision in their statutes for the use of a formula method.  See, for example, Oregon Revised Statutes, § 307.820, and Kansas Statutes Annotated, chapter 79, § 304.

             [[Orig. Op. Page 9]]

            It is interesting to note that the Oregon provision expressly gives to the taxpayer an option to use either a percentage method or an identification method.  The Washington statutes, in contrast, do not expressly give such an option, and we can find no basis for finding such an option by implication.

            We trust the foregoing will be of assistance to you.

Very truly yours,

JOHN J. O'CONNELL
Attorney General

TIMOTHY R. MALONE
Assistant Attorney General

                                                         ***   FOOTNOTES   ***

1/To express the formula algebraically:  If C represents total purchases, C/1 total purchases from out-of-state, D total sales, and D/1 total sales to out-of-state customers, then the formula could be expressed as follows:

   (C/1   D/1)
      x  )  x Year-end inventory = Amount of exemption
   (C    D )

2/See, Journal of the Senate, 1963 Ex. Sess., p. 201.

3/Ibid, p. 234.

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