WAC 458-20-251
Sewerage collection and other related
activities. (1) Introduction. RCW 82.16.020 levies a public
utility tax upon persons engaging in the business of sewerage
collection. This rule provides guidance on the assessment of
the public utility tax upon sewerage collection businesses,
including the distinction between sewerage collection and
other related business activities. It also describes how to
determine the taxable gross receipts of a sewerage collection
business that also engages in other related business
activities. Additionally, the rule addresses a sewerage
collection business's business and occupation (B&O), retail
sales, and use tax reporting responsibilities. Municipalities
and other governmental entities engaging in sewerage
collection business activities should also refer to WAC 458-20-189 for guidance on the taxation of public service
businesses and enterprise activities.
(2) What is a sewerage collection business? A sewerage
collection business is the activity of accepting sewage to be
deposited into and carried off by a system of lateral sewers,
drains, and pipes to a common point, or points, for transfer
to treatment or disposal, but does not include the actual
transfer, treatment, or disposal of sewage. A sewerage
collection business includes only that portion of a sewer
system where "collection" occurs. Sewerage collection ends
when the sewage exits the lateral sewers in a sewer system.
Collection does not include the further transfer of sewage
through a system of intercepting sewers or the final treatment
or disposal of sewage.
(a) What is the difference between sewage and sewerage?
Sewage is the waste matter carried off by sewer drains and
pipes. Sewerage refers to the physical facilities (e.g.,
pipes, lift stations, and treatment and disposal facilities)
through which sewage flows.
(b) What is the difference between lateral and
intercepting sewers?
(i) A lateral sewer is a branch sewer running laterally
down a street, alley, or easement that collects sewage
directly from abutting properties and delivers it into an
intercepting sewer.
(A) The sewage from abutting properties is collected
through sewer pipes running from the abutting properties to
the lateral sewer in the street, alley, or easement. If a
sewerage collection business is responsible for maintaining
any portion of such a sewer pipe, that portion is considered
to be part of the lateral sewer.
(B) A lateral sewer may include force mains or lift
stations if such equipment is installed as part of a lateral
sewer line.
(ii) An intercepting sewer is a main sewer that receives
flow from laterals and delivers the sewage to another main
sewer or to a point for treatment or disposal.
The following diagram illustrates how sewer pipes in a
sewerage system are categorized as lateral or intercepting
sewers. The diagram does not attempt to represent any
publicly maintained portions of sewer pipes that run from
abutting properties to the lateral sewer in the street, alley,
or easement.
(c) How are drainage utility charges accounted for?
Certain real estate development projects (due to paving and
other factors) may adversely affect rainwater runoff within
areas served by a stormwater sewer system. Often, the
stormwater system is administered by the same entity that
operates a sewerage collection business. In this
circumstance, some sewerage utilities impose a drainage
utility charge on the development to reflect the impact on the
utility's stormwater sewer system caused by the increased
runoff. Other sewerage utilities charge all sewerage
customers an additional drainage utility charge to reflect
stormwater runoff. Although the same entity may be providing
both stormwater and sanitary sewer collection services to the
customer and many of the same facilities may be used, a
drainage utility charge is not related to the collection of
sewage for treatment and disposal. Therefore, a sewerage
collection business does not include this activity. Utility
drainage charges are, however, subject to B&O taxation under
the service and other activities classification, as discussed
in subsection (4) below.
(3) How is the public utility tax determined? Persons
engaged in the sewerage collection business are subject to the
public utility tax under the sewer collection classification
measured by the gross receipts of the collection business.
(See RCW 82.16.020.) Gross receipts of the sewerage
collection business include only that portion of income from
customer billings that is allocable to the collection of
sewage by a sewerage collection business. Gross receipts do
not include any charges of any kind attributable to sewerage
services other than collection.
There are two methods to determine the gross receipts of
the collection business.
(a) Itemization of customer billings. If customer
billings are itemized to show the actual charge for sewage
collection, income realized from those billings is the gross
receipts tax measure. If the itemized charges for sewage
collection are less than the actual cost of providing the
collection service, however, the sewerage collection business
must use the cost-of-doing-business formula in subsection
(3)(b) below.
(b) Cost-of-doing-business formula. If collection
services are provided jointly with other related sewer
services provided by the sewerage collection business or any
other person, and the actual charge for sewerage collection is
not itemized separately on customer billings or is less than
the actual cost of providing the collection service, a simple
cost-of-doing-business formula is used to derive the gross
receipts public utility tax measure.
(i) Formula. The costs of providing sewerage collection
services are divided by all business costs incurred in
rendering all sewer services, including sewerage collection.
The resulting percentage is multiplied by gross income from
customer billings (all sewerage related charges). The result
is the gross receipts public utility tax measure from engaging
in the sewerage collection business. The standard cost
accounting records of the sewerage collection business must be
used for this purpose.
The formula is:
Sewerage collection costs
(Annualized)
=
% x gross billing
income
=
Public
Utility
Tax
Measure
Total sewer service costs
(Annualized)
In determining sewage collection costs for a sewerage
collection business that also engages in related business
activities involving the interception, transfer, storage,
treatment, and/or disposal of sewage, only lateral sewers are
considered collection sewers. Intercepting sewers are not
collection sewers and may not be allocated to collection
activities. All costs of operation of the sewer services
business must be included in the denominator, including, but
not limited to, direct operating costs and direct and indirect
overhead costs. When circumstances warrant, the department
may allow certain equipment -- such as force mains or pump
stations -- to be converted into an equivalent length of pipe
for purposes of allocating costs accurately.
(ii) Annual year-end adjustment. For the purpose of
annualizing its costs, the sewerage collection business may
use the previous calendar year costs or its budget allocations
for the current tax year. In either case, however, it must
make an end-of-year adjustment to its reporting based upon
actual costs incurred during the current year.
(c) Late charges/penalties excluded. Revenue from late
charges or other penalties for untimely payment by sewerage
collection customers must be excluded when calculating gross
receipts under subsection (3)(a) and (b) above. Receipts from
these sources are subject to B&O taxation under the service
and other activities classification as provided in subsection
(4) below. (See WAC 458-20-179, Public utility tax, for
further explanation of the taxation of late charge penalties.)
(d) Preutility service activities excluded. Services
provided to a customer prior to receipt of sewerage collection
services are subject to B&O taxation under the service and
other activities classification as provided in subsection (4)
below. For example, many sewerage collection businesses
assess connection charges to a new customer before providing
sewerage collection services to that customer. Such a
connection charge may be variable (calculated as a charge per
linear foot of road frontage for example) or a flat fee. A
sewerage collection business may assess other charges for
specific services provided to new customers, such as
installing or inspecting the installation of service
connections. In each case, the revenue from such fees is
taxable under the service and other activities classification
as long as the service for which the fee is assessed is
performed before the sewerage collection business provides
collection services to that customer. (See WAC 458-20-179,
Public utility tax, for further explanation of the taxation of
preutility service activities.)
(e) Treatment or disposal costs deduction. RCW 82.16.050(11) provides that in computing the public utility
tax, a sewerage collection business may deduct from its
reported gross income amounts paid by the business to a person
taxable under chapter 82.04 RCW for the treatment or disposal
of sewage. The deduction provided by RCW 82.16.050(11) may be
taken on the combined excise tax return only when the receipts
related to treatment or disposal are included in the gross
amounts reported under the sewer collection classification.
(4) How are related business activities taxed? Persons
engaged in the sewerage collection business may also be
engaged in related business activities involving the
interception, transfer, storage, treatment, and/or disposal of
sewage. These activities are generally subject to the service
and other activities B&O tax. The measure of tax is the gross
income or gross proceeds derived from those other services.
The measure of tax does not include any amount subject to the
sewerage collection public utility tax classification. The
amount of gross income or gross proceeds subject to the
service and other activities B&O tax must be determined
consistent with the method used to determine the gross
receipts subject to the sewage collection public utility tax
(see subsection (3) above).
(5) What if a governmental sewerage collection business
pays a separate governmental entity for sewage interception,
treatment or disposal? RCW 82.04.432 provides a deduction
from the B&O tax measure for amounts paid by municipal
sewerage utilities and other public corporations to any other
municipal corporation or governmental agency for sewage
interception, treatment, or disposal. Thus, in such cases the
service and other activities B&O tax on sewer services does
not have a pyramiding effect. In addition, RCW 82.04.4291
provides a B&O tax deduction for amounts derived by a
political subdivision of the state of Washington from another
political subdivision of the state of Washington as
compensation for services subject to the service and other
activities B&O tax. Income received from the state of
Washington or its agencies and departments, however, is not
deductible under RCW 82.04.4291. Thus, the local government
entity that receives compensation from another local
government entity for providing sewage interception,
treatment, or disposal for that other government entity may
also deduct the income from its own measure of service and
other activities B&O tax, provided this amount has been
included in the gross amount reported on the combined excise
tax return. In such a case, neither entity pays tax on the
amounts represented by the payments made for sewage
interception, treatment, or disposal.
For example, Washington Municipality A operates a
sewerage collection business. Rather than invest in its own
treatment facilities, it contracts with Washington
Municipality B to provide sewage transfer, treatment, and
disposal services to Municipality A. When determining its tax
liability, Municipality A must break down its sewage service
charges (as provided in subsection (3) above) into a sewerage
collection portion and that portion representing other sewage
services (interception, transfer, treatment, and disposal).
Municipality A pays public utility tax on its gross receipts
from the sewerage collection business. Municipality A also
pays service and other activities B&O tax on income derived
from that portion of sewage transfer that it undertakes to
move the waste to Municipality B for further transfer,
treatment, and disposal by Municipality B. However,
Municipality A may deduct from its gross income subject to
service and other activities B&O tax the amount of any
payments made to Municipality B for sewage transfer,
treatment, or disposal services provided by Municipality B.
In addition, pursuant to RCW 82.04.4291, Municipality B may
deduct from its gross income subject to service and other
activities B&O tax the amount of the payments received from
Municipality A.
(6) Local improvement district assessments. Local
improvement district (LID) and utility local improvement
district (ULID) assessments, including interest and penalties
on assessments, are not considered part of taxable income for
either public utility tax or B&O tax purposes because they are
exercises of the jurisdiction's taxing authority. These
assessments may be composed of a share of the costs of capital
facilities, installation labor, connection fees, and other
expenses. A deduction may be taken for these amounts if they
are included in the LID or ULID assessments.
(7) Property purchased and used by a sewerage collection
business. Persons engaged in the sewerage collection business
and/or engaged in providing other related sewer services are
themselves the consumers of all tangible personal property
purchased for their own use in conducting those activities.
Retail sales tax (commonly referred to as "deferred sales
tax") or use tax must be remitted directly to the department
upon all tangible personal property used by a sewerage
collection business or sewer service provider as a consumer,
if the retail sales tax has not been collected by the seller.
(See RCW 82.12.020.)
(8) Sale of sludge. With proper treatment, it is
possible for the sludge remaining after the initial treatment
of raw sewage to be used as fertilizer. If a sewerage
collection business sells sludge, manufacturing B&O tax is due
on the value of the products and retailing or wholesaling B&O
tax is due on the gross proceeds of the sale. A multiple
activities tax credit (MATC) applies as provided in RCW 82.04.440 and WAC 458-20-19301. If the sludge is sold to a
consumer, retail sales tax is due on the proceeds of that
sale, unless otherwise exempt by law.
If the necessary requirements are met, the business may
claim a manufacturing machinery and equipment (M&E) exemption
for machinery and equipment used directly in manufacturing the
sludge (rendering it suitable for use as a fertilizer). This
exemption is not available for machinery or equipment used
merely to treat sewage for disposal.
