AN ACT Relating to the business and occupation taxation of investment income; amending RCW 82.04.4281, 82.04.300, 82.04.390, and 82.04.460; adding new sections to chapter 82.04 RCW; adding a new section to chapter 82.32 RCW; creating a new section; and providing an effective date.

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

NEW SECTION. Sec. 1. INVESTMENT BUSINESS INCOME. "Investment business income" includes:

(1) All amounts derived from investments or the use of money as such, if the investment activity is related to the regular course of the taxpayer's trade or business; and

(2) All dividends and interest income, regardless of the nature of the investment activity.

NEW SECTION. Sec. 2. DIVIDENDS. "Dividends" means those dividends taxable for federal income tax purposes without regard to any federal dividend exclusion or deduction.

NEW SECTION. Sec. 3. INTEREST INCOME. "Interest income" includes:

(1) Any interest income taxable for federal income tax purposes, except any interest income with respect to which taxation under this chapter is prohibited by federal law; and

(2) Any interest income from obligations issued by or on behalf of any state or local agency, except interest income from obligations issued by or on behalf of any Washington agency.

NEW SECTION. Sec. 4. STATE OR LOCAL AGENCY. "State or local agency" includes each state, each state agency or political subdivision, and each public instrumentality, state or local authority, agency, district, or similar public entity created under state law.

NEW SECTION. Sec. 5. WASHINGTON AGENCY. "Washington agency" includes the state of Washington and each state or local agency created under the laws of the state of Washington.

Sec. 6. Section 2, chapter 37, Laws of 1980 and RCW 82.04.4281 are each amended to read as follows:

DEDUCTIONS‑-INVESTMENTS AND INTERCORPORATE DIVIDENDS. (1) In computing tax there may be deducted from the measure of tax amounts derived by persons, other than ((~~those engaging in banking, loan, security, or other financial businesses~~)) corporations, from investments or the use of money as such, ((~~and also~~)) except that amounts derived as investment business income are not deductible under this subsection.

(2) In computing tax there may be deducted from the measure of tax amounts derived as dividends by a parent from its subsidiary corporations.

NEW SECTION. Sec. 7. A new section is added to chapter 82.04 RCW to read as follows:

DEDUCTION‑-SUBCHAPTER S CORPORATION. In computing tax there may be deducted from the measure of tax amounts derived as investment business income by each S corporation as defined in section 1361 of the federal internal revenue code, as in effect on January 1, 1986.

Sec. 8. Section 82.04.300, chapter 15, Laws of 1961 as last amended by section 213, chapter 3, Laws of 1983 and RCW 82.04.300 are each amended to read as follows:

BUSINESS AND OCCUPATION TAX THRESHOLD. This chapter shall apply to any person engaging in any business activity taxable under RCW 82.04.230, 82.04.240, 82.04.250, 82.04.260, 82.04.270, 82.04.280 and 82.04.290 other than those whose value of products, gross proceeds of sales, or gross income of the business is less than ((~~one thousand dollars per month~~)) fifty thousand dollars per tax year: PROVIDED, That where one person engages in more than one business activity and the combined measures of the tax applicable to such businesses equal or exceed ((~~one thousand dollars per month~~)) fifty thousand dollars per tax year, no exemption or deduction from the amount of tax is allowed by this section.

Any person claiming exemption under the provisions of this section may be required to file returns even though no tax may be due((: PROVIDED, FURTHER, That the department of revenue may allow exemptions, by general rule or regulation, in those instances in which quarterly, semiannual, or annual returns are permitted. Exemptions for such periods shall be equivalent in amount to the total of exemptions for each month of a reporting period)).

Sec. 9. Section 82.04.390, chapter 15, Laws of 1961 and RCW 82.04.390 are each amended to read as follows:

EXEMPTIONS‑-SALE OF REAL ESTATE. This chapter shall not apply to gross proceeds derived from the sale of real estate or from the rental of real estate with occupancy for a continuous period of one month or more. This however, shall not be construed to allow a deduction of amounts received as commissions from the sale of real estate, nor as fees, handling charges, discounts, interest or similar financial charges resulting from, or relating to, real estate transactions.

Sec. 10. Section 82.04.460, chapter 15, Laws of 1961 as last amended by section 154, chapter 7, Laws of 1985 and RCW 82.04.460 are each amended to read as follows:

BUSINESS WITHIN AND WITHOUT STATE‑-APPORTIONMENT. (1) Any person rendering services taxable under RCW 82.04.290 and maintaining places of business both within and without this state which contribute to the rendition of such services shall, for the purpose of computing tax liability under RCW 82.04.290, apportion to this state that portion of his gross income which is derived from services rendered within this state. Where such apportionment cannot be accurately made by separate accounting methods, the taxpayer shall apportion to this state that proportion of his total income which the cost of doing business within the state bears to the total cost of doing business both within and without the state.

(2) Notwithstanding the provision of subsection (1) of this section, persons doing business both within and without the state who receive gross income from service charges, as defined in RCW 63.14.010 (relating to amounts charged for granting the right or privilege to make deferred or installment payments) or who receive gross income from engaging in business as financial institutions within the scope of chapter 82.14A RCW (relating to city taxes on financial institutions) shall apportion or allocate gross income taxable under RCW 82.04.290 to this state pursuant to rules promulgated by the department consistent with uniform rules for apportionment or allocation developed by the states.

(3) Notwithstanding the provisions of subsection (1) of this section, persons receiving gross income from the investment of money as such, other than gross income subject to subsection (2) of this section, shall apportion or allocate gross income according to rules of the department if the gross income subject to tax under RCW 82.04.290 does not fairly represent the extent of the taxpayer's income attributable to this state. The rules shall be, so far as feasible, consistent with the methods of apportionment contained in this section and shall require the consideration of those facts, circumstances, and apportionment factors as will result in an equitable and constitutionally permissible division of the income.

(4) The department shall by rule provide a method or methods of apportioning or allocating gross income derived from sales of telephone services taxed under this chapter, if the gross proceeds of sales subject to tax under this chapter do not fairly represent the extent of the taxpayer's income attributable to this state. The rules shall be, so far as feasible, consistent with the methods of apportionment contained in this section and shall require the consideration of those facts, circumstances, and apportionment factors as will result in an equitable and constitutionally permissible division of the services.

NEW SECTION. Sec. 11. A new section is added to chapter 82.32 RCW to read as follows:

COPIES‑-FEDERAL AND STATE RETURNS. The department may require any taxpayer to furnish to the department copies or pertinent extracts of:

(1) Any return or document pertaining to tax liability which the taxpayer has filed with or received from this state, another state, or the federal government; and

(2) Any statement or registration made under any state or federal law pertaining to securities or securities exchange regulations.

NEW SECTION. Sec. 12. 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. 13. CAPTIONS. Section captions as used in this act do not constitute any part of the law.

NEW SECTION. Sec. 14. CODIFICATION. Sections 1 through 5 of this act are each added to chapter 82.04 RCW and shall be codified between RCW 82.04.020 and 82.04.212.

NEW SECTION. Sec. 15. EFFECTIVE DATE. This act shall take effect January 1, 1987.