VETO MESSAGE ON SB 6470-S

                   April 3, 1998

To the Honorable President and Members,

  The Senate of the State of Washington

Ladies and Gentlemen:

     I am returning herewith, without my approval as to section 8, Engrossed Substitute Senate Bill No. 6470 entitled:

"AN ACT Relating to the tax treatment of canned and custom software;"

     Sections 1 through 7 of ESSB 6470 specify that the sale of custom software is the provision of a service, as is the customization of canned software, and is taxable under the service classification of the business and occupation (B&O) tax.

     Section 8 of this bill would provide a B&O tax credit for software businesses that have their principal place of business in a distressed county.  However, the bill as written, would allow a qualifying software company with headquarters in a distressed county to also exempt from the B&O tax all its operations located in a non-distressed county.  This could lead to a business establishing only a small office with few employees in the distressed county, defeating the purpose of the legislation.  While Section 8 was intended to provide an innovative approach to rural economic development, this language results in a significant tax loophole that will not benefit the citizens of rural distressed counties.

     I proposed several economic development packages for distressed counties in the 1998 legislative session, and I strongly agree with the concept presented in section 8 of this bill.  However, section 8 of this bill would have unintended consequences.  I would support a more finely crafted bill.

     For these reasons, I have vetoed section 8 of Engrossed Substitute Senate Bill No. 6470.

     With the exception of section 8, Engrossed Substitute Senate Bill No. 6470 is approved.

                   Respectfully submitted,

                   Gary Locke

                   Governor