Z-1101.2  _______________________________________________


                          HOUSE BILL 2641



State of Washington      57th Legislature     2002 Regular Session


By Representatives Gombosky, Cairnes, Kessler, Morris, Berkey, Edwards, Kenney, Linville, Ogden and Conway; by request of Governor Locke


Read first time 01/23/2002.  Referred to Committee on Finance.

Implementing the recommendations of the investment income tax deduction task force for the business and occupation tax.

    AN ACT Relating to implementing the recommendations of the investment income tax deduction task force for the business and occupation tax; amending RCW 82.04.4281; creating a new section; and declaring an emergency.




    NEW SECTION.  Sec. 1.  The legislature finds that the application of the business and occupation tax deductions provided in RCW 82.04.4281 for investment income of persons deemed to be "other financial businesses" has been the subject of uncertainty, and therefore, disagreement and litigation between taxpayers and the state.  The legislature further finds that the decision of the state supreme court in Simpson Investment Co. v. Department of Revenue could lead to a restrictive, narrow interpretation of the deductibility of investment income for business and occupation tax purposes.  As a result, the legislature directed the department of revenue to work with affected businesses to develop a revision of the statute that would provide certainty and stability for taxpayers and the state.  The legislature intends, by adopting this recommended revision of the statute, to provide a positive environment for capital investment in this state, while continuing to treat similarly situated taxpayers fairly.


    Sec. 2.  RCW 82.04.4281 and 1980 c 37 s 2 are each amended to read as follows:

    (1) In computing tax there may be deducted from the measure of tax:

    (a) 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)); and

    (b) Amounts derived as dividends or distributions from capital account by a parent from its subsidiary ((corporations)) entities.

    (2) The following are not deductible under subsection (1)(a) of this section:

    (a) Amounts received from loans or the extension of credit to another, revolving credit arrangements, installment sales, the acceptance of payment over time for goods or services, or any of the foregoing that have been transferred by the originator of the same to an affiliate of the transferor; or

    (b) Amounts received by a banking, lending, or security business.

    (3) The definitions in this subsection apply only to this section.

    (a) "Banking business" means a person engaging in business as a national or state-chartered bank, a mutual savings bank, a savings and loan association, a trust company, an alien bank, a foreign bank, a credit union, a stock savings bank, or a similar entity that is chartered under Title 30, 31, 32, or 33 RCW, or organized under Title 12 U.S.C.

    (b) "Lending business" means a person engaged in the business of making secured or unsecured loans of money, or extending credit, and (i) more than one-half of the person's gross income is earned from such activities and (ii) more than one-half of the person's total expenditures are incurred in support of such activities.

    (c) The terms "loan" and "extension of credit" do not include ownership of or trading in publicly traded debt instruments, or substantially equivalent instruments offered in a private placement.

    (d) "Security business" means a person, other than an issuer, who is engaged in the business of effecting transactions in securities as a broker, dealer, or broker-dealer, as those terms are defined in the securities act of Washington, chapter 21.20 RCW, or the federal securities act of 1933.  "Security business" does not include any company excluded from the definition of broker or dealer under the federal investment company act of 1940 or any entity that is not an investment company by reason of sections 3(c)(1) and 3(c)(3) through 3(c)(14) thereof.


    NEW SECTION.  Sec. 3.  This act is necessary for the immediate preservation of the public peace, health, or safety, or support of the state government and its existing public institutions, and takes effect immediately.


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