Can We Use REET Funds for That?

MRSC consultants get a lot of questions, and as you might imagine, certain topics generate a higher number of questions than others. One such topic is the use of restricted revenues, such as revenue gained through Real Estate Excise Taxes (REET).

REET is known as a tax levied by the state on the sale of most real estate property, but cities, towns, and counties can also impose a local REET tax (REET 1 or REET 2). The revenue brought in via REET 1 or 2 taxes is restricted and can only be used for certain purposes as determined by state statute.

Here, we will address the use of REET funds specifically with regards to two expenditure types that frequently come up in questions related to REET — expenditures for studies/planning and for equipment/vehicles.

In this blog we are going to answer definitively (yes, definitively, at least unless or until something changes) whether or not you can use REET funds for these expenses using real inquiries that MRSC has received and the answers we have provided, both of which have been edited for brevity.

First Type of Expenditure — Studies and Plans

Over the years MRSC has gotten many questions about the use of REET revenues (1 and 2) to fund different types of studies (e.g., parks, facilities, critical areas, feasibility) and/or to fund master plans and master plan updates. Here are a few example questions:

• Can REET funds be used to pay for a park study that has the potential to turn into a capital project?
• Our council would like to use existing REET funds to fund a facility study of several city facilities. The facility study is expected to spread over two years and the result would mean the allocation of additional REET funds for capital improvements or new facilities. Can our city use REET funds to cover the study portion of this project?
• Can REET funds be used to do a feasibility study for a sidewalk or transportation project with the possibility it may never be constructed?
• If we conduct a critical areas study for a parks capital project and the project does not come to fruition, is the study expense still eligible to be funded with REET funds?
• Can REET 2 funds be used for a parks master plan as part of the capital improvements plan?

While each one of the above questions generated its own response, including relevant RCWs, the theme is the same and the following excerpts from those responses share a common thread.

• REET funds (both REET 1 and REET 2) may only be used for planning that is directly associated with a capital project that is both defined within the statutes as well as listed within the city’s capital facilities plan.
• It has long been the interpretation by our office [MRSC] that planning in the context of REET use is associated with the engineering and construction design/planning associated with those REET eligible projects. Facility studies are not directly associated with specific capital projects listed within the capital facilities plan (CFP) of the city.
• Because a study may or may not lead to an actual REET eligible project, studies are not included as allowable REET expenses.

In a nutshell, unless the study or plan is directly tied to a specific capital project in your CFP and that project is moving forward and that study or plan is part of the process as the project moves forward (i.e., engineering, pre-design), the study or plan would not be eligible for REET funding.

Second Type of Expenditure — Vehicles and Equipment

Questions that MRSC gets in respect to this type of expenditure are often related to equipment used to perform maintenance work that is allowed under REET statutes.

Other questions relate to vehicles, in part because they are considered “capital” in the accounting world. However, as you will read below, there is a distinct difference between “capital equipment” and “capital project."

Here are examples of these types of questions:

• We have a surplus of REET in our capital fund, and I would like to move it to our general fund to help offset a deficit partially created from purchasing a new vehicle. Can we use REET for this?
• Can one of our departments purchase four-wheelers or arena groomers to maintain certain county property? Would this be an eligible use of REET funds?
• Can REET one-half maintenance funds pay for vehicles that are used for maintenance of capital assets? Either the purchase price, or to pay for replacement and operating rates for those vehicles? This would be vehicles such as paving machines and other larger vehicles with a specific purpose rather than a vehicle driven by maintenance crews.

Again, while each one of the above questions generated its own response, the theme is the same and the following has been excerpted from those responses.

• The use of REET for equipment such as vehicles is not considered a “capital project” and/or capital improvement as defined by statute.
• The RCWs provide a rather exhaustive list of definitions for “capital project” for both REET 1 and 2. In addition, the definition of “maintenance” for both (RCW 82.46.015) and (RCW 82.46.037) is the same and reads as follows:
  • For purposes of this section, “maintenance” means the use of funds for labor and materials that will preserve, prevent the decline of, or extend the useful life of a capital project. “Maintenance” does not include labor or material costs for routine operations of a capital project. [Emphasis added by MRSC.]
• REET 1 and REET 2 funds may not be used for vehicles. According to the statutes, REET funds can only be used for “planning, acquisition, construction, reconstruction, repair, replacement, rehabilitation, or improvement” of specific capital projects.

The Washington State Attorney General (AGO) also weighed in on the topic in 1984 in an informal letter between Philip H. Austin, Senior Deputy Attorney General, and Allen R. Hancock, Deputy Prosecuting Attorney of Island County, after Hancock reached out seeking guidance on whether or not ‘capital improvements’ could also include a vehicle purchase. The AGO's reply states:

Expenditures that are not allowed are such things as the purchase of police cars or backhoes. Accountants may consider these to be “capital” for accounting purposes, but they are not considered “capital purposes” or “local capital improvements” as defined in the REET statute.

Conclusion

Hopefully, this clears up why the answer is “No” to using REET funds for these types of expenditures. For additional questions, visit our Real Estate Excise Taxes (REET) webpage or submit an inquiry.