SENATE BILL REPORT

SB 6665

This analysis was prepared by non-partisan legislative staff for the use of legislative members in their deliberations. This analysis is not a part of the legislation nor does it constitute a statement of legislative intent.

Background: On June 1, 2010, Washington adopted an economic nexus standard for certain types of business activities. Under this standard, an out-of-state business deriving income within Washington in excess of $250,000 from sources such as advertising or royalties, is subject to Washington's business and occupation (B&O) tax even though the business may not have a physical presence in the state.

The question has been raised as to whether national television networks have nexus with Washington, and therefore, owe B&O tax on their advertising and royalty income. Also at issue is whether or not the national networks owe B&O tax under the radio and television broadcasting classification of the B&O tax which has the tax rate of .484 percent on advertising revenues. The Department of Revenue maintains that the national networks are not considered radio and television broadcasters and, thus, both the advertising and royalty revenue received by national networks and apportioned to Washington are subject to the 1.5 percent B&O rate. The apportioned rate would be approximately 2.2 percent of their national income. Most, if any, national networks have not reported B&O taxes to the the state. This issue is likely to be litigated.

Summary of Bill (Proposed First Substitute): A classification is created in the B&O tax statutes for the gross income of television programming providers, including advertising income, but not royalty income, with the service tax rate of 1.5 percent.

Non-royalty income of television programming providers is apportioned to Washington by dividing Washington’s population by the population of all the states in the taxpayer’s market, with specific adjustments for national, regional, and local television programming providers. The apportionment for the different types of programming providers are as follows:

national television programming providers - the applicable ratio may not exceed 1.1 percent;
regional television programming providers - the ratio must exclude the population of a state outside the person's primary market to the extent necessary to ensure the ratio fairly represents the person's activity in this state; and
local television programming providers - the applicable ratio is 100 percent reduced by the percentage of out-of-state viewers.

The bill applies prospectively and retroactively to June 1, 2010.

Penalties will be waived on taxes paid for the period June 1, 2010 through June 30 2016, if the taxes are remitted prior to October 1, 2016. This would include both advertising and royalty income.

Staff Summary of Public Testimony: This bill reduces litigation risks by ending the dispute on how these companies pay their B&O tax. It would also provide for payment of those taxes by the end of this year. We believe our industry should be taxed at the local broadcaster rate because we have the same FCC licenses, but we believe the bill is a reasonable comprise and would bring certainty to the industry. Some members would prefer to litigate as the tax burden would still be greater than other areas of the country.