AN ACT Relating to revenue and taxation; amending RCW 82.03.130, 82.03.140, and 82.03.180; adding a new title to the Revised Code of Washington to be numbered Title 82A RCW; adding a new section to chapter 82.04 RCW; prescribing penalties; and providing an effective date.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF WASHINGTON:

PART I

GENERAL PROVISIONS

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NEW SECTION. Sec. 1. INTENT. It is the intent of the legislature in adopting this act to provide the necessary revenues for the support of vital state services on a more equitable basis.

PART II

DEFINITIONS

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NEW SECTION. Sec. 2. INTRODUCTORY. Unless the context clearly requires otherwise, the definitions in this part apply throughout this title.

NEW SECTION. Sec. 3. ADJUSTED GROSS INCOME. "Adjusted gross income" means adjusted gross income as determined under the Internal Revenue Code.

NEW SECTION. Sec. 4. CORPORATION. "Corporation" means a taxpayer taxable as a corporation under the Internal Revenue Code.

NEW SECTION. Sec. 5. DEPARTMENT. "Department" means the state department of revenue.

NEW SECTION. Sec. 6. FEDERAL BASE INCOME. "Federal base income" means:

(1) For regulated investment companies, investment company income as defined in section 852 of the Internal Revenue Code;

(2) For real estate investment trusts, real estate investment trust income as defined in section 857 of the Internal Revenue Code;

(3) For an S corporation, as defined in section 1361 of the Internal Revenue Code, only those amounts subject to federal tax under sections 1374 and 1375 of the Internal Revenue Code;

(4) For an electing GSOC, as defined in section 1391 of the Internal Revenue Code, the amount subject to federal tax under section 1396 of the Internal Revenue Code; and

(5) For all other taxpayers, federal taxable income as determined under the Internal Revenue Code.

NEW SECTION. Sec. 7. INTERNAL REVENUE CODE. "Internal Revenue Code" means the United States Internal Revenue Code of 1954 and amendments thereto, as existing on January 14, 1985.

NEW SECTION. Sec. 8. PERSON. "Person" includes individuals, corporations, partnerships, firms, companies, fiduciaries, estates, trusts, and any other group or combination acting as a unit.

NEW SECTION. Sec. 9. S CORPORATION. "S corporation" means an S corporation as defined in section 1361 of the Internal Revenue Code.

NEW SECTION. Sec. 10. TAXABLE INCOME. "Taxable income" means federal base income as modified under sections 401 through 409 of this act.

NEW SECTION. Sec. 11. TAXABLE YEAR. "Taxable year" means the taxpayer's taxable year as defined under the Internal Revenue Code.

NEW SECTION. Sec. 12. TAXPAYER. "Taxpayer" means a corporation receiving income subject to tax under this title.

NEW SECTION. Sec. 13. DEFINITION OF TERMS GENERALLY. Except as provided in this part, any term used in this title has the same meaning as when used in a comparable context in the Internal Revenue Code.

PART III

DETERMINATION OF TAX

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NEW SECTION. Sec. 14. TAX IMPOSED. (1) A tax is imposed at the rate of twenty percent on all taxable income received by corporations, for each taxable year.

(2) The tax imposed under this section applies only to corporations with less than five million dollars of gross income under the federal Internal Revenue Code which elect to be taxed under this title in lieu of chapter 82.04 RCW. The department shall adopt rules to implement this subsection.

PART IV

TAXABLE INCOME MODIFICATIONS

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NEW SECTION. Sec. 15. INTRODUCTORY. In computing taxable income, modifications shall be made to the taxpayer's federal base income as required under this Part and Part V of this act, unless the modification has the effect of duplicating an item of income or deduction.

NEW SECTION. Sec. 16. STATE AND LOCAL BONDS. To federal base income, add income which has been excluded under section 103 of the Internal Revenue Code in computing federal base income, except interest on obligations of the state of Washington or political subdivisions of the state of Washington. However, the amount added under this subsection shall be reduced by related expenses not deducted in computing federal base income because of section 265 of the Internal Revenue Code.

NEW SECTION. Sec. 17. STATE AND LOCAL INCOME TAXES. To federal base income, add taxes on or measured by income which have been deducted under section 164 of the Internal Revenue Code in computing federal base income.

NEW SECTION. Sec. 18. CARRY-OVERS. To federal base income, add amounts which have been deducted in computing federal base income to the extent the amounts have been carried over from taxable years ending before the effective date of this title.

NEW SECTION. Sec. 19. FEDERAL BONDS. From federal base income, deduct, to the extent included in federal base income, income derived from obligations of the United States which this state is prohibited by federal law from subjecting to a net income tax. However, the amount deducted under this section shall be reduced by any expense, including amortizable bond premium, incurred in the production of such income to the extent the expense has been deducted in calculating federal base income.

NEW SECTION. Sec. 20. ACTIVITIES SUBJECT TO BUSINESS AND OCCUPATION TAX. From federal base income, deduct, to the extent included in federal base income, income attributable to amounts which were required to be reported for purposes of chapter 82.04 RCW for periods prior to the effective date of this section.

NEW SECTION. Sec. 21. NONPROFIT ORGANIZATIONS. From federal base income, deduct income exempt from federal income tax under subchapter F of chapter 1 of the Internal Revenue Code, to the extent included in federal base income. However, add to federal base income those amounts subject to federal income taxation to the extent not included in federal base income.

NEW SECTION. Sec. 22. PUBLIC UTILITIES. From federal base income, deduct income attributable to activities subject to tax under chapter 82.16 RCW. However, the amount deducted under this section shall be reduced by any expense incurred in the production of such income to the extent the expense has been deducted in calculating federal base income.

NEW SECTION. Sec. 23. INSURANCE PREMIUMS. From federal base income, deduct income received as premiums by insurers holding valid certificates of authority issued by the insurance commissioner of this state if the premiums are subject to tax under RCW 48.14.020. However, the amount deducted under this section shall be reduced by any expense incurred in the production of such income to the extent the expense has been deducted in calculating federal base income. Income received by agents of insurers and brokers for insurers shall not be deducted under this section.

NEW SECTION. Sec. 24. TAX RETURNS FOR FRACTIONAL YEAR. If the first taxable year of any taxpayer with respect to which a tax is imposed by this title ends before December 31st of the calendar year in which this title becomes effective (referred to in this section as a fractional taxable year), the taxable income for the fractional taxable year shall be the taxpayer's taxable income for the entire taxable year, adjusted by one of the following methods, at the taxpayer's election:

(1) The taxable income shall be multiplied by a fraction. The numerator of the fraction is the number of days in the fractional taxable year. The denominator of the fraction is the number of days in the entire taxable year.

(2) The taxable income shall be adjusted, in accordance with rules of the department, so as to include only such income and be reduced only by such deductions as can be clearly determined from the permanent records of the taxpayer to be attributable to the fractional taxable year.

NEW SECTION. Sec. 25. DISPOSITION, SALE, OR EXCHANGE OF PROPERTY HELD PRIOR TO EFFECTIVE DATE OF SECTION. Taxable income shall be computed without including any gain or deducting any loss on the disposition, sale, or exchange of property if such gain or loss is attributable to holding the property prior to the effective date of this section. The portion of gain or loss attributable to the taxpayer's holding period prior to the effective date of this section shall be the ratio that the holding period of the taxpayer expressed in months prior to the effective date of this section bears to the total holding period of the taxpayer expressed in months. This section applies only to gain or loss which is considered as a capital gain or loss under the Internal Revenue Code for property for which the holding period under the Internal Revenue Code is greater than one year.

For purposes of this section, a fractional part of a month shall be treated as a full month.

PART V

DIVISION OF INCOME, MODIFICATIONS, AND CREDITS

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NEW SECTION. Sec. 26. APPORTIONMENT AND ALLOCATION OF INCOME. (1) For corporations other than financial organizations or public utilities, all income shall be apportioned and allocated to this state except income which is apportioned or allocated to another state under RCW 82.56.010.

(2) For financial organizations and public utilities (as defined respectively in subsections (d) and (f) of section 1 of Article IV of RCW 82.56.010) which are taxable both within this state and in another state (within the meaning of section 3 of Article IV of RCW 82.56.010) the amount of net income to be apportioned and/or allocated to this state shall be determined in accordance with rules promulgated by the department. The rules shall, as far as the department deems practicable, be consistent with the provisions of Article IV of RCW 82.56.010. In developing the rules, the department shall also give appropriate consideration to any uniform regulations adopted by the multistate tax commission pursuant to Article VIII of RCW 82.56.010, and to the rules of other states in which the financial organizations and public utilities are also taxable.

NEW SECTION. Sec. 27. PARTNERSHIPS AND S CORPORATIONS. (1) Partnerships are not subject to tax under this title.

(2) S corporations are not subject to tax under this title, except for income subject to federal tax under sections 1374 and 1375 of the Internal Revenue Code.

PART VI

ADMINISTRATIVE PROVISIONS

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NEW SECTION. Sec. 28. METHOD OF ACCOUNTING. (1) A taxpayer's method of accounting for purposes of the tax imposed under this title shall be the same as the taxpayer's method of accounting for federal income tax purposes. If no method of accounting has been regularly used by a taxpayer for federal income tax purposes, tax due under this title shall be computed by a method of accounting which in the opinion of the department fairly reflects income.

(2) If a taxpayer's method of accounting is changed for federal income tax purposes, it shall be similarly changed for purposes of this title.

NEW SECTION. Sec. 29. RECORDS‑-RETURNS. (1) Every taxpayer and every person required to collect the tax imposed under this title shall keep records, render statements, make returns, file reports, and perform other acts, as the department requires by rule. Each return shall be made under penalty of perjury and on forms prescribed by the department. The department may require other statements and reports be made under penalty of perjury and on forms prescribed by the department. The department may require any taxpayer and any person required to collect the tax imposed under this title to furnish to the department a correct copy of any return or document which the taxpayer has filed with the internal revenue service or received from the internal revenue service.

(2) All books and records and other papers and documents required to be kept under this title are subject to inspection by the department at all times during business hours of the day.

NEW SECTION. Sec. 30. COMBINED REPORTING. (1) The department may permit or require an affiliated corporation that is subject to taxation under this title and that is a part of a unitary group of affiliated corporations to file a combined report covering the unitary operation of the group. The report shall contain such information as shall be designated in rules adopted by the department.

(2) An affiliated corporation is a corporation that is a member of a group of two or more corporations with a common owner or owners, either corporate or noncorporate, where more than fifty percent of the voting stock of each member corporation is directly or indirectly owned by the common owner or owners or by one or more of the member corporations.

(3) An affiliated corporation is a part of a unitary group when it is engaged in business activities which are integrated with, dependent upon, or which contribute to the business activities of the group as a whole, and the business activities of the group are carried on and are taxable in more than one state.

(4) The income attributable to the Washington activities of an affiliated corporation which is a part of a unitary group of affiliated corporations shall be determined by the apportionment of the entire business net income of the unitary group and the allocation of nonbusiness income of the corporation, using the factors and methods in section 501 of this act and the rules of the department adopted under section 501 of this act.

NEW SECTION. Sec. 31. ESTIMATION AGREEMENTS. The department may reasonably estimate the items of business or nonbusiness income of a taxpayer having an office within the state and one or more other states or foreign countries which may be apportioned or allocated to the state and may enter into estimation agreements with such taxpayers for the determination of their liability for the tax imposed by this title.

NEW SECTION. Sec. 32. PROVISIONS OF INTERNAL REVENUE CODE CONTROL. (1) To the extent possible without being inconsistent with this title, all of the provisions of the Internal Revenue Code relating to the following subjects apply to the taxes imposed under this title:

(a) Time and manner of payment of tax imposed under this title.

(b) Periods of limitation upon assessment and collection of taxes. However, if a taxpayer fails to report a change or correction increasing the taxpayer's federal taxable income, or fails to report a change or correction which is treated as if it were a deficiency for federal income tax purposes, an assessment may be made at any time within one year of the date on which the department first learns of the change or correction.

(d) Liability of transferees.

(e) Closing agreements and compromises.

(f) Deficiency procedures, except that the state board of tax appeals shall review deficiencies under chapter 82.03 RCW.

(g) Penalties and additions for failure to timely file returns or pay taxes.

(h) Timing, amount, and manner of payment of estimated tax payments.

(i) Time and manner of making returns, verification of returns, and the time when a return is deemed filed.

(j) Powers of the secretary of the treasury, exercised under this title by the department, to prepare and execute returns, to prescribe forms, to enforce collection of the tax through liens and seizure of property, and to impose penalties.

(2) The department by rule may provide modifications and exceptions to the provisions listed in subsection (1) of this section if reasonably necessary to facilitate the prompt, efficient, and equitable collection of tax under this title.

NEW SECTION. Sec. 33. RULES. The department may adopt rules under chapter 34.04 RCW for the administration and enforcement of this title. The rules, to the extent possible without being inconsistent with this title, shall follow the Internal Revenue Code, and the regulations and rulings of the United States treasury department with respect to the federal income tax. The department may adopt as a part of these rules any portions of the Internal Revenue Code and treasury department regulations and rulings, in whole or in part.

NEW SECTION. Sec. 34. REFUNDS OF OVERPAYMENTS‑-OTHER ADMINISTRATIVE PROVISIONS. (1) The department shall refund all taxes and penalties improperly paid or collected.

(2) RCW 82.32.110, 82.32.120, 82.32.130, 82.32.320, 82.32.330, 82.32.340, and 82.32.380 apply to the administration of the taxes imposed under this title.

NEW SECTION. Sec. 35. CRIMES. (1) Any person who knowingly attempts to evade or defeat the tax imposed under this title or payment thereof is guilty of a class C felony as provided in chapter 9A.20 RCW.

(2) Any person required to collect tax imposed under this title who knowingly fails to collect, truthfully account for, or pay over the tax is guilty of a class C felony as provided in chapter 9A.20 RCW.

(3) Any person who knowingly fails to pay tax, pay estimated tax, make returns, keep records, or supply information, as required under this title, is guilty of a gross misdemeanor as provided in chapter 9A.20 RCW.

PART VII

APPEALS

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Sec. 36. APPEALS TO BOARD‑-JURISDICTION AS TO TYPES OF APPEALS. Section 42, chapter 26, Laws of 1967 ex. sess. as last amended by section 6, chapter 46, Laws of 1982 1st ex. sess. and RCW 82.03.130 are each amended to read as follows:

The board shall have jurisdiction to decide the following types of appeals:

(1) Appeals taken pursuant to RCW 82.03.190.

(2) Appeals from a county board of equalization pursuant to RCW 84.08.130.

(3) Appeals by an assessor or landowner from an order of the director of revenue made pursuant to RCW 84.08.010 and 84.08.060, the right to such an appeal being hereby established.

(4) Appeals by an assessor or owner of an intercounty public utility or private car company from determinations by the director of revenue of equalized assessed valuation of property and the apportionment thereof to a county made pursuant to chapter 84.12 RCW and 84.16 RCW, the right to such appeal being hereby established.

(5) Appeals by an assessor, landowner, or owner of an intercounty public utility or private car company from a determination of any county indicated ratio for such county compiled by the department of revenue pursuant to RCW 84.48.075: PROVIDED, That

(a) Said appeal be filed after review of the ratio under RCW 84.48.075(3) and not later than fifteen days after the date of certification as required by RCW 84.48.075; and

(b) The hearing before the board shall be expeditiously held in accordance with rules prescribed by the board and shall take precedence over all matters of the same character.

(6) Appeals relating to the sale of shorelands under RCW 79.94.210.

(7) Appeals relating to timber tax stumpage values under RCW 84.33.091.

(8) Appeals relating to the valuation of farm and agricultural land under RCW 84.34.065.

(9) Appeals relating to property tax exemptions under RCW 84.36.850.

(10) Appeals relating to income tax deficiencies under Title 82A RCW.

Sec. 37. APPEALS TO BOARD‑-ELECTION OF FORMAL OR INFORMAL HEARING. Section 43, chapter 26, Laws of 1967 ex. sess. as amended by section 8, chapter 46, Laws of 1982 1st ex. sess. and RCW 82.03.140 are each amended to read as follows:

In all appeals over which the board has jurisdiction under RCW 82.03.130, a party taking an appeal may elect either a formal or an informal hearing, such election to be made according to rules of practice and procedure to be promulgated by the board: PROVIDED, HOWEVER, That nothing herein shall be construed to modify the provisions of RCW 82.03.190: AND PROVIDED FURTHER, That upon an appeal under RCW 82.03.130(5) or (10), the director of revenue may, within ten days from the date of its receipt of the notice of appeal, file with the clerk of the board notice of its ((~~intention that the hearing be held pursuant to chapter 34.04 RCW~~)) election of a formal hearing. In the event that appeals are taken from the same decision, order, or determination, as the case may be, by different parties and only one of such parties elects a formal hearing, a formal hearing shall be granted.

Sec. 38. JUDICIAL REVIEW OF BOARD'S DECISIONS. Section 47, chapter 26, Laws of 1967 ex. sess. as amended by section 9, chapter 46, Laws of 1982 1st ex. sess. and RCW 82.03.180 are each amended to read as follows:

(1) For appeals other than those under RCW 82.03.130(10), judicial review of a decision of the board of tax appeals shall be de novo in accordance with the provisions of RCW 82.32.180 or 84.68.020 as applicable except when the decision has been rendered pursuant to a formal hearing elected under RCW 82.03.140 or 82.03.190, in which event judicial review may be obtained only pursuant to RCW 34.04.130 and 34.04.140: PROVIDED, HOWEVER, That nothing herein shall be construed to modify the rights of a taxpayer conferred by RCW 82.32.180 and 84.68.020 to sue for tax refunds: AND PROVIDED FURTHER, That no review from a decision made pursuant to RCW 82.03.130(1) may be obtained by a taxpayer unless within the petition period provided by RCW 34.04.130 the taxpayer shall have first paid in full the contested tax, together with all penalties and interest thereon, if any. The director of revenue shall have the same right of review from a decision made pursuant to RCW 82.03.130(1) as does a taxpayer; and the director of revenue and all parties to an appeal under RCW 82.03.130(5) shall have the right of review from a decision made pursuant to RCW 82.03.130(5).

(2) Within thirty days after the final decision of the board in a case under RCW 82.03.130(10) in which a formal hearing is elected, the taxpayer or the department may appeal to the court of appeals. The appeal shall be perfected by filing with the clerk of the court of appeals a petition for review and by serving a copy thereof by mail or personally on the opposing party. The petitioner shall pay the costs of preparing the record of the hearing, and thereafter the board shall file with the clerk of the court the original or a certified copy of the entire record of the proceeding under review. RCW 34.04.130(6) applies to this review, and a bond shall be required for the review if requested by the department. The appropriate division of the court of appeals in which the petition for review is to be filed shall be, at the option of the petitioner, either division II or that division containing the district in which is located the petitioner's residence or principal place of business. The method of judicial review of the board of tax appeals decision provided in this subsection is exclusive. Nothing in this subsection prevents an appeal from the court of appeals to the state supreme court in the same manner as in other civil cases. There shall be no judicial review of a final decision of the board under RCW 82.03.130(10) in which a formal hearing has not been elected.

NEW SECTION. Sec. 39. JUDICIAL REVIEW OF CLAIM FOR REFUND. Any person having filed a claim for refund or credit on any tax, penalty, or other sum collected under this title may, within the applicable period of limitation provided in section 605(1)(b) of this act, sue for a refund or credit on the tax, penalty, or other sum in the superior court of Thurston county. All procedures and rights of appeal governing other civil actions apply to these proceedings.

This section does not apply to any tax payment which has been the subject of an appeal to the state board of tax appeals with respect to which a formal hearing has been held.

PART VIII

EXCISE TAX PROVISIONS

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NEW SECTION. Sec. 40. A new section is added to chapter 82.04 RCW to read as follows:

This chapter does not apply to corporations electing to pay tax under Title 82A RCW as provided in section 301 of this act.

PART IX

CONSTRUCTION‑-CODIFICATION‑-EFFECTIVE DATE

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NEW SECTION. Sec. 41. SEVERABILITY. If any provision of this act or its application to any person or circumstance is held invalid, the remainder of the act or the application of the provision to other persons or circumstances is not affected.

NEW SECTION. Sec. 42. CODIFICATION‑-CAPTIONS. Sections 101 through 608 and 704 of this act shall be codified as a new title in the Revised Code of Washington, to be numbered Title 82A.

Section captions constitute no part of the law.

NEW SECTION. Sec. 43. EFFECTIVE DATE. This act shall take effect on January 1, 1986, if the proposed amendment to Article VII of the state Constitution authorizing an income tax (HJR ___) is validly submitted and is approved and ratified by the voters at a general election held in November, 1985. If the proposed amendment is not so approved and ratified, this act shall be null and void in its entirety.