Director's Rule 5-033
When Tax Liability Arises
When Tax Liability Arises
(1) Method of reporting. Gross proceeds of sales and gross income shall be included in the return for the period in which the value proceeds or accrues to the taxpayer. For the purpose of determining tax liability of persons making sales of tangible personal property or providing services, a sale takes place when activity is entered into the taxpayer's business records (invoiced or billed) and the buyer has received the goods or services. With respect to leases or rentals of tangible personal property, tax liability arises as of the time the lease or rental payments fall due (see Seattle Rule 5-536). See also Seattle Rule 5-126 regarding conditional and installment sales.
(2) Accrual basis.
(a) Amounts actually received do not constitute value accruing to the taxpayer in the period in which received if the value accrues to the taxpayer during another period. It is immaterial if the act or service for which the consideration accrues is performed or rendered, in whole or in part, during a period other than the tax return period. The controlling factor is the time when the taxpayer is entitled to receive, or takes credit for, the consideration.
(b) When tax returns are prepared upon the accrual basis, value accrues to a taxpayer at the time:
(i) The taxpayer becomes legally entitled to receive the consideration; or,
(ii) In accordance with the system of accounting regularly employed, enters as a charge against the purchaser, customer, or client the amount of the consideration agreed upon, whether payable immediately or at a definitely determined future time.
(3) Cash receipts basis.
(a) See Seattle Rule 5-037 for limitation as to persons who may report on the cash receipts basis.
(b) When tax returns are prepared upon a cash receipts basis, value proceeds to a taxpayer at the time the taxpayer actually or constructively receives the payment. It is immaterial that the contract is performed, in whole or in part, during a period other than the one in which payment is received.
(4) Special application, contractors. Value accrues for a building or construction contractor who maintains his or her accounting records on the accrual basis, as of the time the contractor becomes entitled to compensation under the contract.
(a) If the contract provides that the taxpayer becomes entitled to compensation upon estimates as the work progresses, value, to the extent of such estimates, accrues as of the time that each estimate is made and the balance at the time of the completion of the work or of the final billing.
(b) If the contract provides that the taxpayer becomes entitled to compensation only upon the completion of the work, value accrues as of the earlier of the completion of the work, or, any use of the facilities being constructed, or, 60 days after the facility is substantially complete.
Example: A contractor agrees to build two buildings for a buyer. Under the terms of the contract, payment is to be made only upon completion of both buildings. One building is substantially completed and occupied on April 15, 2005; the other building is substantially completed on May 15, 2005 and occupied on July 1, 2005. The work on both buildings is completed under the contract on June 15, 2005. Value accrues for the first building on April 15, 2005, the date it was used. Value accrues for the remainder of the contract on June 15, 2005, the date the work was completed.
Example: A contractor agrees to build a building for a buyer. Under the terms of the contract, the buyer is to make payment for the building only upon completion of the building. The building is completed, except for minor alterations, and available for planned occupancy on August 15, 2005. However, because of a contract dispute between the buyer and his tenant for the building, the buyer is unable to pay the contractor until February 25, 2006 when the building is finally occupied. The building is completed under the contract on November 15, 2005. Value accrues on the building for business license tax purposes on October 14, 2005, 60 days after August 15, 2005, the date the building was substantially complete.
(5) Warehousemen. In the case of warehousemen, value proceeds or accrues to the taxpayer as follows:
(a) When the taxpayer is reporting upon the accrual basis, value accrues at the time the charge for storage is entered into the taxpayer's books of account in accordance with the terms of the contract between the parties and the regular system of accounting employed by the taxpayer. Value accrues when the charge is entered into the taxpayer's books of account whether the consideration for storage is at a fixed rate per unit per month or other period, or, at a flat charge regardless of the length of time, or, whether payable periodically or at the time of withdrawal.
For example, a warehouseman keeping his books on an accrual basis customarily charges the owner of the goods the full amount of a flat storage charge at the time the goods are received. Even though the payment is deferred until the goods are withdrawn value accrues as of the time the goods are received. However, if the warehouseman customarily does not enter such charge until the time of withdrawal, value accrues at the time of withdrawal.
(b) When the taxpayer is reporting upon a cash receipts basis, value proceeds at the time the payment for storage is received.
Effective: May 15, 2007
DIRECTOR'S CERTIFICATION
I Dwight D. Dively, Director of the Department of Finance of the City of Seattle, do hereby certify under penalty of perjury of law, that the within and foregoing is a true and correct copy as adopted by the City of Seattle, Department of Finance.
DATED this day of May, 2007.
CITY OF SEATTLE