BILL REQ. #:  S-4276.1 

Read first time 01/27/2004.   Referred to Committee on Ways & Means.

     AN ACT Relating to apportionment of gross income taxable under RCW 82.04.290 for entities engaging in business activities both within and outside this state; amending RCW 82.04.297 and 82.04.460; adding a new section to chapter 82.04 RCW; and creating a new section.

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

NEW SECTION.  Sec. 1   The legislature finds that, in order to comply with the interstate commerce clause for apportionment purposes, the department of revenue has construed the phrase "maintaining a place of business" in existing law to mean engaging in activities that would subject a taxpayer to tax under chapter 82.04 RCW if performed in this state.
     Furthermore, the legislature finds that one area in which apportionment problems arise is with regard to service activities provided by internet service providers engaging in business activities inside and outside Washington. Internet service providers engaging in business activities in Washington and in other states need an equitable way to apportion to this state that portion of their gross income earned from providing such services in Washington.
     The legislature intends to affirm the department of revenue's construction of existing law and to provide a method by which internet service providers can equitably apportion their gross receipts among the states in which they provide internet services.

Sec. 2   RCW 82.04.297 and 2000 c 103 s 5 are each amended to read as follows:
     (1) The provision of internet services is subject to tax under RCW 82.04.290(2).
     (2) The definitions in this subsection apply throughout this chapter.
     (a) "Electronically supplied service" means a service that is taxable under RCW 82.04.290(2) and that relies on the internet for its operation, is automated, and involves only occasional and incidental human intervention. "Electronically supplied service" includes, but is not limited to:
     (i) Services that provide a web site or web page, or support a business or personal presence on the internet, or a proprietary subscriber network;
     (ii) Services that are automatically generated from a computer, via the internet or a proprietary subscriber network, in response to specific data input by the customer; or
     (iii) Internet advertising services and enhanced internet advertising services.
     (b) "Electronically supplied service" does not include any services taxable under RCW 82.04.290(2) if the only use of the internet is to deliver the work product.
     (c) "Enhanced internet advertising services" means business arrangements that solely involve listing products or services on a web site in conjunction with the performance of additional business activities, including activities such as electronic order taking, payment processing, auction listings, and other similar arrangements that connect buyers and sellers through the internet.
     (d) "Human intervention" does not include the creation or acquisition of content that is stored electronically and made available for access by customers via the internet nor does it include customer or technical support services provided to assist customers in the use of an electronically supplied service.
     (e) "Internet" means the international computer network of both federal and nonfederal interoperable packet switched data networks, including the graphical subnetwork called the world wide web.
     (((3))) (f) "Internet advertising services" means advertising, marketing, and solicitations that are conducted solely on or through the internet or on internet web sites and involves the provision of advertising, marketing, and solicitations via the internet using sound, video, banners, click-through, hyperlinks, metatags, text, and graphical representations.
     (g) "Internet service" means a service that includes computer processing applications, provides the user with additional or restructured information, or permits the user to interact with stored information through the internet or a proprietary subscriber network. "Internet service" includes provision of internet electronic mail, access to the internet for information retrieval, and hosting of information for retrieval over the internet or the graphical subnetwork called the world wide web. The term also includes an electronically supplied service.

Sec. 3   RCW 82.04.460 and 1985 c 7 s 154 are each amended to read as follows:
     (1) Except as otherwise provided in this section, any person ((rendering services)) engaging in business activities in this state 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)) engaging in business activities outside this state that contribute more than incidentally to such in-state activities, 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)) business activities performed 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)) adopted by the department consistent with uniform rules for apportionment or allocation developed by the states.
     (3) 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.
     (4) Any person subject to tax under this chapter engaging in the activity of providing internet services in this state, and engaging in business activities outside this state that contribute more than incidentally to such in-state activity, shall apportion to this state that portion of gross income derived from internet service activity performed within this state as provided in section 4 of this act.
     (5) Activities performed outside the state contribute more than incidentally to in-state activities only to the extent that such activities would subject the taxpayer to the tax under this chapter if performed in this state.

NEW SECTION.  Sec. 4   A new section is added to chapter 82.04 RCW to read as follows:
     (1) The apportionable income of an internet service provider shall be apportioned to Washington by multiplying the income by a fraction, the numerator of which is the property factor plus the payroll factor plus eight times the sales factor, and the denominator of which is ten. The denominator shall be reduced by the number of missing factors, if any. If the sales factor is missing, the denominator shall be reduced by eight. A factor is missing if both the numerator and denominator of that factor are zero.
     (2)(a) The property factor is a fraction, the numerator of which is the average value of real and tangible personal property owned or rented and used by the taxpayer in this state during the tax period and the denominator of which is the average value of all the taxpayer's real and tangible personal property owned or rented and used during the tax period. For purposes of computing the property factor, "property" includes a co-location arrangement pursuant to which the taxpayer is granted the right to locate computer or telecommunication equipment in an equipment room, cage, rack, or similar space.
     (b) Property owned by the taxpayer is valued at its original cost. Property rented by the taxpayer is valued at eight times the net annual rental rate. The net annual rental rate is the annual rental paid by the taxpayer less any annual rental received by the taxpayer from subrentals. Property occupied under a co-location arrangement is valued at eight times the annual consideration paid for the right to occupy space in an equipment room, cage, rack, or similar space. If property is rented by the taxpayer or occupied under a co-location arrangement at no charge or at a nominal rate or a rate not otherwise ascertainable, the net annual rental rate or other charge for that property shall be determined on the basis of a reasonable market rental rate for such property.
     (c) For purposes of computing the property factor, "property" includes prewritten computer software as defined by RCW 82.04.215.
     (i) Prewritten computer software included in the property factor is allocated to the location where it is used.
     (ii) The value of the software includes mandatory maintenance agreements and shall be its original cost, or in the case of rented or leased software, the value shall be equal to eight times the annual rental, license, or lease price.
     (d) The average value of property shall be determined by averaging the values at the beginning and end of the tax period. The department may require the averaging of monthly values during the tax period if reasonably required to reflect properly the average value of the taxpayer's property.
     (e) Property used in the production of nonapportionable income shall be excluded from the numerator and denominator of the property factor. Property used in the production of both apportionable and nonapportionable income shall be partially excluded from the numerator and denominator of the property factor to exclude, to the extent possible, the portion of property producing the nonapportionable income.
     (3)(a) The payroll factor is a fraction, the numerator of which is the total amount of compensation paid in this state to employees of the taxpayer during the tax year by the taxpayer and the denominator of which is the total compensation paid to employees of the taxpayer everywhere during the tax year by the taxpayer. Compensation related to the production of both apportionable and nonapportionable income shall be partially excluded from the numerator and denominator of the payroll factor to exclude, to the extent possible, the portion of compensation related to the production of nonapportionable income.
     (b) Compensation is paid in this state if:
     (i) The individual's service is performed entirely within this state;
     (ii) The individual's service is performed within and without this state, but the service performed without this state is incidental to the individual's service within this state;
     (iii) A portion of the service is performed within this state and the base of operations of the individual is in this state;
     (iv) A portion of the service is performed within this state and, if there is no base of operations, the place from which the individual's service is directed or controlled is in this state;
     (v) A portion of the service is performed within this state and neither the base of operations of the individual nor the place from which the service is directed or controlled is in any state in which some part of the service is performed, but the individual's residence is in this state; or
     (vi) The individual is neither a resident of nor performs services in this state but is directed or controlled from an office in this state and returns to this state periodically for business purposes and the state in which the individual resides does not have authority under the United States Constitution to impose on the employer a gross receipts tax. For this purpose a gross receipts tax is any tax imposed on or measured by the gross volume of business, and in the determination of which the deductions allowed would not make the tax a net income or value added tax, and the tax is not, pursuant to law or custom, separately stated on customer invoices.
     (c) "Compensation" means wages, salaries, commissions, and any other form of remuneration paid to or accrued to employees for personal services. Employer contributions under a qualified cash plan, deferred arrangement plan, and nonqualified deferred compensation plan are included in the payroll factor. Stock based compensation is included in the payroll factor to the extent included in gross income for federal income tax purposes.
     (4)(a) The sales factor is a fraction, the numerator of which is the total receipts of the taxpayer from providing internet services in this state during the tax period, and the denominator of which is the total receipts of the taxpayer from providing internet services everywhere during the tax period.
     (b) For purposes of computing the sales factor, internet services are considered provided in this state if:
     (i) Except as provided in (c) of this subsection, the receipt of the service by the purchaser occurs in this state as determined by instructions provided by the purchaser to the taxpayer regarding delivery of any tangible personal property to which the service relates;
     (ii) The address for the purchaser is located in this state as indicated by the business records of the taxpayer maintained in the regular course of business, and (b)(i) of this subsection does not apply;
     (iii) The address for the purchaser obtained during consummation of the sale, including any address of a purchaser's payment instrument when readily available to the taxpayer and no other address is available, is located in this state, and (b)(i) and (ii) of this subsection do not apply; or
     (iv) The commercial domicile of the taxpayer is in this state, and (b)(i), (ii), and (iii) of this subsection do not apply.
     (c)(i) Notwithstanding any other provision in this section to the contrary, the sale of internet advertising services is considered provided in this state in the ratio that internet usage in this state bears to the total internet usage in the United States.
     (ii) Internet advertising is not considered provided in this state if the web site displaying the advertising predominantly uses a language spoken by less than fifteen percent of Washington residents and does not have a United States universal resource locator ending in .biz, .net, .org, .com, or other similar United States universal resource locator.
     (d) Notwithstanding any other provision in this section to the contrary, the sale of enhanced internet advertising that constitutes an internet service is considered provided in this state in the ratio that the number of service purchasers in this state bears to the total service purchasers purchasing the taxpayer's enhanced internet advertising services in the United States.
     (5)(a) If the apportionment provisions of this section do not fairly represent the extent of its business activity in this state, the taxpayer may use, or the department may prospectively require, in respect to all or any part of the taxpayer's business activity of providing internet services:
     (i) Separate accounting;
     (ii) A calculation of tax liability using the cost of doing business method outlined in RCW 82.04.460(1);
     (iii) The exclusion of any one or more of the apportionment factors;
     (iv) The inclusion of one or more additional apportionment factors that will fairly represent the taxpayer's business activity in this state; or
     (v) The employment of any other method to effectuate an equitable apportionment of the gross income of the taxpayer derived from business activity in this state.
     (b) The party seeking to apply this subsection (5) has the burden to prove by clear, cogent, and convincing evidence that:
     (i) The apportionment provisions of this section do not fairly represent the extent of taxpayer's business activity in this state; and
     (ii) The proposed alternative does fairly represent the extent of taxpayer's business activity in this state.
     (c) If a taxpayer uses an alternative apportionment method permitted under this subsection (5) in preparing its return, a statement describing such alternative method must be filed with such return to which the alternative method relates. In the event a taxpayer fails to file such a statement disclosing the use of an alternative apportionment method, the department may disregard the use of such method and apply the general apportionment provisions of this section. A taxpayer may not use more than one method of apportionment for each calendar year, or part thereof, during which the taxpayer is subject to the taxes imposed under this chapter. A taxpayer seeking to use an alternative apportionment method must apply the same method to all tax periods in which an assessment for taxes may be made under RCW 82.32.050(3) and that involves the same material facts.
     (6) The definitions in this subsection apply throughout this section.
     (a) "Apportionable income" means income derived from providing internet services and subject to apportionment under RCW 82.04.460(4) after exclusions, deductions, and exemptions, but before apportionment.
     (b) "Internet service provider" means a person who provides internet services and who is entitled to apportion under RCW 82.04.460(4).
     (7) The department shall adopt such rules as may be necessary to administer the provisions of this section, including rules for the measurement of internet usage which shall, to the extent reliably available, be based on published statistics of internet usage. In the absence of published statistics of internet usage the department may use any reasonable method of measurement, including population or other demographic data published by the United States census bureau.