AN ACT Relating to the business and occupation taxation of investment income; amending RCW 82.04.4281, 82.04.300, and 82.04.390; adding new sections to chapter 82.04 RCW; adding a new section to chapter 82.32 RCW; creating new sections; 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 dividends, interest income, and gains from the sale or exchange of capital assets.

NEW SECTION. Sec. 2. NONBUSINESS INVESTMENT INCOME. "Nonbusiness investment income" means amounts derived from investments or the use of money as such, other than investment business income.

NEW SECTION. Sec. 3. DIVIDENDS. "Dividends" means those dividends taxable for federal income tax purposes without regard to any federal dividend exclusion or deduction.

NEW SECTION. Sec. 4. 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. 5. GAINS FROM THE SALE OR EXCHANGE OF CAPITAL ASSETS. "Gains from the sale or exchange of capital assets" includes:

(1) Net gain as determined for federal income tax purposes, after due allowance for losses and holding periods from (a) sales or exchanges of capital assets or assets treated as capital assets, other than obligations of any Washington agency, or (b) from transactions or events taxable to the taxpayer as such sales or exchanges, and being the net amount includable in the taxpayer's adjusted gross income, with respect to all such sales, exchanges, transactions, or events, under the provisions of the Internal Revenue Code in effect for the taxable year; and

(2) Net gains from sales or exchanges of certain depreciable property, not includable in the taxpayer's adjusted gross income as net capital gains subject to the deduction allowed under Section 1202 of the Internal Revenue Code, but includable in such adjusted gross income as supplemental gains determined in accordance with Internal Revenue Service Form 4797.

NEW SECTION. Sec. 6. 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. 7. 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. 8. Section 2, chapter 37, Laws of 1980 and RCW 82.04.4281 are each amended to read as follows:

DEDUCTIONS‑-NONBUSINESS INVESTMENT INCOME. 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, from ((~~investments or the use of money as such, and also amounts derived as dividends by a parent from its subsidiary corporations~~)) nonbusiness investment income.

NEW SECTION. Sec. 9. A new section is added to chapter 82.04 RCW to read as follows:

DEDUCTIONS‑-SALE OF PRINCIPAL RESIDENCE. In computing tax there may be deducted from the measure of tax the amount of gains derived by an individual from the sale or exchange of the individual's principal residence.

Sec. 10. 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~~)) four thousand dollars per month: 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~~)) four thousand dollars per month, 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. 11. 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. This however, shall not be construed to allow a deduction of:

(1) Amounts included within investment business income; nor

(2) 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.

NEW SECTION. Sec. 12. 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. 13. NONSEVERABILITY. If any provision of sections 1 through 8 of this act or the application of any of those sections to any person is held invalid, the amendment of RCW 82.04.300 by section 10 of this act shall be void and without effect.

NEW SECTION. Sec. 14. CAPTIONS. Section captions as used in this act do not constitute any part of the law.

NEW SECTION. Sec. 15. LEGISLATIVE DIRECTIVE. Sections 1 through 7 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. 16. EFFECTIVE DATES. This act shall take effect January 1, 1987.