BILL REQ. #:  H-3059.1 

Read first time 04/13/2005.   Referred to Committee on Finance.

     AN ACT Relating to taxation of unearned income; amending RCW 82.03.130 and 82.03.140; adding a new title to the Revised Code of Washington to be codified as Title 82A RCW; prescribing penalties; and providing an effective date.

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

NEW SECTION.  Sec. 101   DEFINITIONS. Unless the context clearly requires otherwise, the definitions in this section apply throughout this title. Except as provided in this section, any term used in this title has the same meaning as when used in a comparable context in the internal revenue code.
     (1) "Department" means the state department of revenue.
     (2) "Director" means the director of the department.
     (3) "Individual" means a natural person.
     (4) "Internal revenue code" means the United States internal revenue code of 1986, as amended or renumbered as of January 1, 2005.
     (5) "Taxable income" means income received from:
     (a) Interest from bonds, notes, money at interest, and from all debts due the person to be taxed, except interest from notes or bonds of this state and notes or bonds of any political subdivision of this state;
     (b) Dividends, other than stock dividends paid in new stock of the company issuing the same, on shares in all corporations and joint stock companies organized under the laws of any state, territory, or nation;
     (c) Dividends, other than stock dividends paid in new stock of the partnership, limited liability company, association, or trust issuing the same, on shares in partnerships, limited liability companies, associations, or trusts if the beneficial interest is represented by transferable shares;
     (d) Dividends, other than that portion of a dividend declared by corporations to be a return of capital and considered by the federal internal revenue service to be such, the exemption of which is permitted by section 104 of this act.
     (6) "Taxable year" means the taxpayer's taxable year as defined under the internal revenue code.
     (7) "Taxpayer" means a person receiving income subject to tax under this title.

NEW SECTION.  Sec. 102   UNEARNED INCOME TAX IMPOSED. A one percent tax is imposed on the taxable income of:
     (1) Individuals; and
     (2) Partnerships, limited liability companies, associations, and trusts, the beneficial interest in which is not represented by transferable shares, whose gross interest and dividend income from all sources exceeds three thousand dollars during the taxable year.

NEW SECTION.  Sec. 103   PERSONAL EXEMPTIONS. The following exemptions may be deducted from taxable income:
     (1) Three thousand dollars for each individual taxpayer;
     (2) Three thousand dollars for each individual taxpayer's spouse if the taxpayer is entitled to an exemption for the spouse under section 151(b) of the internal revenue code.

NEW SECTION.  Sec. 104   EXEMPT INCOME. The tax imposed under this title does not apply to:
     (1) Interest and dividend income received by an employee benefit plan as defined by the employee retirement income security act of 1974, 29 U.S.C. Sec 1002(3), or any successor act enacted for the purpose of regulating employee benefit plans, or an individual retirement arrangement, keogh plan, or any other arrangement pursuant to which payment of federal tax on the income thereof and of the plan sponsors, participants, and beneficiaries is deferred; either to the plan or arrangement or to its sponsors, participants, or beneficiaries, irrespective of when or whether all or any portion of such income is accumulated or expended for the benefit of, or distributed in any form or manner to, such sponsors, participants, or beneficiaries;
     (2) Any amount received from the sale, exchange, or transfer of either a share of corporate stock or any other transferable share under this title, whether by way of liquidation, redemption, or otherwise, and irrespective of the identity of the parties to the sale, exchange, or transfer;
     (3) Any distribution of capital, whether in liquidation or otherwise, but accumulated profits shall not be regarded as capital;
     (4) Any amount received and used by any educational, religious, or charitable organization incorporated or organized in this state, for the purposes for which it is established as long as none of the income or profits of the organization is divided among stockholders or members or is used for purposes other than those for which it is established, or which is received by any trustee for the use of the state or any of its political subdivisions, or for the use of the organization for these purposes;
     (5) Income accumulated in an employee benefit plan, as defined by the employment retirement income security act of 1974, 29 U.S.C. Sec. 1002(3), as amended, or in a trust comprising a part of such a plan.

NEW SECTION.  Sec. 105   APPLICATION OF TAX IN CERTAIN CIRCUMSTANCES. (1) For the purposes of the tax imposed under this title, any securities or property of the classes designated herein producing taxable income, held in pledge, or on margin, or otherwise as security for a debt of the owner, whether standing in the name of the owner or of any other person, shall be deemed the property of the owner, and the income arising therefrom shall be included in his or her total taxable income.
     (2) The estates of deceased persons who last lived in this state shall be subject to tax under this title upon all taxable income received by such persons during their lifetime, which has not already been taxed. The income received by estates during administration shall be taxable to the estate, except the proportion that equals the proportion of the estate to be distributed to nontaxable persons or organizations.
     (3) The income received by estates held by trustees, any one of whom is an inhabitant of this state, or has derived his or her appointment from a court of this state, shall be subject to the taxes imposed by this title, except that income received by estates held by trustees treated as grantor trusts under section 671 of the United States internal revenue code shall be included in the return of their owners, to the extent that the persons to whom the income from the trust is payable, or for whose benefit it is accumulated, are inhabitants of this state.
     (4) Income accumulated in trust for the benefit of unborn or unascertained persons shall be taxed as if accumulated for the benefit of inhabitants of this state.
     (5) If an inhabitant of this state receives income from one or more trustees, none of whom is an inhabitant of this state or has derived his or her appointment from a court of this state, the income is subject to the taxes imposed under this title if it would be taxable to the inhabitant if received by him or her from its source.
     (6) Subsections (2) through (5) of this section apply to guardians, conservators, trustees in bankruptcy, receivers, and assignees for the benefit of creditors, as applicable, to the taxable income received by them and to their beneficiaries, and to corporations acting as trustees or in any other fiduciary capacity.
     (7) Partnerships and limited liability companies having a usual place of business in this state, any member of which is an inhabitant thereof, shall be subject to taxes imposed under this title. If any of the members of the partnership or limited liability company are not inhabitants of this state only the income that is proportionate to the aggregate interest of the partners or members who are inhabitants of this state in the profits of the partnership or limited liability company is subject to tax.                                        .
     (8) The tax shall be assessed on such a partnership or limited liability company by the name under which it does business, and the partners or members shall not be taxed with respect to the taxable income derived by them from such a partnership or limited liability company.
     (9) An inhabitant of this state who is a member of a partnership or limited liability company having no usual place of business in this state, who receives income from such partnership or limited liability company derived from such a source that it would be taxable if received directly from such source by such partner or member, shall as to such income be subject to the taxes imposed by this title.
     (10) Subsections (7) through (9) of this section apply, so far as apt, to associations and trusts, but not to partnerships, limited liability companies, associations, and trusts, the beneficial interest in which is represented by transferable shares.

NEW SECTION.  Sec. 106   TAX RETURNS FOR FRACTIONAL YEAR. If the first taxable year of any taxpayer with respect to which a tax is imposed by this title ends before December 31st of the calendar year in which this title becomes effective, referred to in this section as a fractional taxable year, the taxable income for the fractional taxable year shall be the taxpayer's taxable income for the entire taxable year, adjusted by one of the following methods, at the taxpayer's election:
     (1) The taxable income shall be multiplied by a fraction. The numerator of the fraction is the number of days in the fractional taxable year. The denominator of the fraction is the number of days in the entire taxable year.
     (2) The taxable income shall be adjusted, in accordance with rules of the department, so as to include only such income and be reduced only by such deductions as can be clearly determined from the permanent records of the taxpayer to be attributable to the fractional taxable year.

NEW SECTION.  Sec. 107   ESTIMATION AGREEMENTS. The department may reasonably estimate the items of business or nonbusiness income of a taxpayer having an office within the state and one or more other states or foreign countries that may be apportioned or allocated to the state and may enter into estimation agreements with such taxpayers for the determination of their liability for the tax imposed by this title.

NEW SECTION.  Sec. 108   ESTIMATED TAX IMPOSED--DUE DATE OF ESTIMATED TAXES--AMOUNT OF ESTIMATED TAX--UNDERPAYMENT PENALTY. (1) Each taxpayer who is required by the internal revenue code to make payment of estimated taxes shall pay to the department on forms prescribed by the department the estimated taxes due under this title.
     (2) The provisions of the internal revenue code relating to the determination of reporting periods and due dates of payments of estimated tax apply to the estimated tax payments due under this section.
     (3) The amount of the estimated tax shall be the annualized tax divided by the number of months in the reporting period. No estimated tax shall be due if the annualized tax is less than five hundred dollars. The provisions of RCW 82.32.050 and 82.32.090 shall apply to underpayments of estimated tax but shall not apply to underpayments if the tax remitted to the department under sections 101 through 117 of this act is either ninety percent of the tax shown on the return or one hundred percent of the tax shown on the previous year's tax return.
     (4) For purposes of this section, the annualized tax is the taxpayer's projected tax liability for the taxable year as computed under section 6654 of the internal revenue code and the regulations thereunder.

NEW SECTION.  Sec. 109   METHOD OF ACCOUNTING. (1) A taxpayer's method of accounting for purposes of the tax imposed under this title shall be the same as the taxpayer's method of accounting for federal income tax purposes. If no method of accounting has been regularly used by a taxpayer for federal income tax purposes or if the method used does not clearly reflect income, tax due under this title shall be computed by a method of accounting that in the opinion of the department fairly reflects income.
     (2) If a person's method of accounting is changed for federal income tax purposes, it shall be similarly changed for purposes of this title.

NEW SECTION.  Sec. 110   PERSONS REQUIRED TO FILE RETURNS. (1) All taxpayers shall file with the department, on forms prescribed by the department, an income tax return for each taxable year. An individual owing no tax for a taxable year is not required to file a return for that year. Each person required to file a return under this title shall, without assessment, notice, or demand, pay any tax due thereon to the department on or before the date fixed for the filing of the return.
     (2) The department may by rule require that certain taxpayers file, on forms prescribed by the department, informational returns for any period.
     (3) If an adjustment to a taxpayer's federal return is made by the taxpayer or the internal revenue service, and the adjustment affects tax liability under this title, the taxpayer shall, within ninety days of the final determination of the adjustment by the internal revenue service or within thirty days of the filing of a federal return adjusted by the taxpayer, file with the department on forms prescribed by the department, a corrected return reflecting the adjustments as finally determined. The taxpayer shall pay any additional tax due resulting from the finally determined internal revenue service adjustment or a taxpayer adjustment without notice and assessment. The period of limitation for the collection of the additional tax, interest, and penalty due as a result of an adjustment by the taxpayer or a finally determined internal revenue service adjustment shall begin at the later of thirty days following the final determination of the adjustment or the date of the filing of the corrected return.
     (4) Every small business corporation within this state, the stockholders of which have been elected, or elect, to report their share of the corporation's taxable income upon their individual federal income tax returns, pursuant to federal tax laws and regulations, shall annually on or before May 1st, file a list of the names and addresses of all stockholders during the preceding year together with the amount of dividends paid to each with the department. Provided, however, the information report shall not be filed in any year that no such dividends are paid and provided further that stockholders not legally residents in this state need not be listed.

NEW SECTION.  Sec. 111   DUE DATE FOR FILING A RETURN--EXTENSIONS--INTEREST AND PENALTIES. The due date of a return required to be filed with the department shall be the due date of the federal income tax return or informational return for federal income tax purposes. The department has the authority to grant extensions of times by which returns required to be filed by this title may be submitted. The department also has the authority to grant extensions of time to pay tax with regard to taxes imposed by this title. Interest at the rate as specified in RCW 82.32.050 shall accrue during any extension period and the interest and penalty provisions of chapter 82.32 RCW shall apply to late payments and deficiencies. Notwithstanding the limitation of RCW 82.32.090, in the case of the late filing of an informational return, there shall be imposed a penalty the amount of which shall be established by the department by rule. The penalty shall not exceed fifty dollars per month for a maximum of ten months. RCW 82.32.105 shall apply to this section.

NEW SECTION.  Sec. 112   JOINT RETURN. (1) If the federal income tax liabilities of both spouses are determined on a joint federal return for the taxable year, they shall file a joint return under this title.
     (2) If neither spouse is required to file a federal income tax return for the taxable year, a joint return shall be filed under this title under the same conditions under which a joint return may be filed for purposes of the federal income tax.
     (3) If the federal income tax liability of either spouse is determined on a separate federal return for the taxable year, they shall file separate returns under this title.
     (4) In any case in which a joint return is filed under this section, the liability of the husband and wife is joint and several, unless the spouse is relieved of liability under section 6013 of the internal revenue code.

NEW SECTION.  Sec. 113   RECORDS--RETURNS. (1) Every taxpayer and every person required to deduct and withhold the tax imposed under this title shall keep records, render statements, make returns, file reports, and perform other acts as the department requires by rule. Each return shall be made under penalty of perjury and on forms prescribed by the department. The department may require other statements and reports be made under penalty of perjury and on forms prescribed by the department. The department may require any taxpayer and any person required to deduct and withhold the tax imposed under this title to furnish to the department a correct copy of any return or document that the taxpayer has filed with the internal revenue service or received from the internal revenue service.
     (2) All books and records and other papers and documents required to be kept under this title are subject to inspection by the department at all times during business hours of the day.

NEW SECTION.  Sec. 114   PROVISIONS OF INTERNAL REVENUE CODE CONTROL. (1) To the extent possible without being inconsistent with this title, all of the provisions of the internal revenue code apply to the taxes imposed under this title.
     (2) The department by rule may provide modifications and exceptions to the provisions in subsection (1) of this section, if reasonably necessary to facilitate the prompt, efficient, and equitable collection of tax under this title.

NEW SECTION.  Sec. 115   ADMINISTRATIVE PROVISIONS. Chapter 82.32 RCW applies to the taxes imposed in this chapter.

NEW SECTION.  Sec. 116   RULES. The department may adopt rules under chapter 34.05 RCW for the administration and enforcement of this title. The rules, to the extent possible without being inconsistent with this title, shall follow the internal revenue code and the regulations and rulings of the United States department of the treasury with respect to the federal income tax. The department may adopt as a part of these rules any portions of the internal revenue code and treasury department regulations and rulings, in whole or in part.

NEW SECTION.  Sec. 117   CRIMES. (1) Any person who knowingly attempts to evade the tax imposed under this title or payment thereof is guilty of a class C felony as provided in chapter 9A.20 RCW.
     (2) Any person required to collect tax imposed under this title who knowingly fails to collect, truthfully account for, or pay over the tax is guilty of a class C felony as provided in chapter 9A.20 RCW.
     (3) Any person who knowingly fails to pay tax, pay estimated tax, make returns, keep records, or supply information, as required under this title, is guilty of a gross misdemeanor as provided in chapter 9A.20 RCW.

Sec. 118   RCW 82.03.130 and 1998 c 54 s 1 are each amended to read as follows:
     (1) The board shall have jurisdiction to decide the following types of appeals:
     (a) Appeals taken pursuant to RCW 82.03.190.
     (b) Appeals from a county board of equalization pursuant to RCW 84.08.130.
     (c) Appeals by an assessor or landowner from an order of the director of revenue made pursuant to RCW 84.08.010 and 84.08.060, if filed with the board of tax appeals within thirty days after the mailing of the order, the right to such an appeal being hereby established.
     (d) Appeals by an assessor or owner of an intercounty public utility or private car company from determinations by the director of revenue of equalized assessed valuation of property and the apportionment thereof to a county made pursuant to chapter 84.12 and 84.16 RCW, if filed with the board of tax appeals within thirty days after mailing of the determination, the right to such appeal being hereby established.
     (e) Appeals by an assessor, landowner, or owner of an intercounty public utility or private car company from a determination of any county indicated ratio for such county compiled by the department of revenue pursuant to RCW 84.48.075: PROVIDED, That
     (i) Said appeal be filed after review of the ratio under RCW 84.48.075(3) and not later than fifteen days after the mailing of the certification; and
     (ii) The hearing before the board shall be expeditiously held in accordance with rules prescribed by the board and shall take precedence over all matters of the same character.
     (f) Appeals from the decisions of sale price of second class shorelands on navigable lakes by the department of natural resources pursuant to RCW 79.94.210.
     (g) Appeals from urban redevelopment property tax apportionment district proposals established by governmental ordinances pursuant to RCW 39.88.060.
     (h) Appeals from interest rates as determined by the department of revenue for use in valuing farmland under current use assessment pursuant to RCW 84.34.065.
     (i) Appeals from revisions to stumpage value tables used to determine value by the department of revenue pursuant to RCW 84.33.091.
     (j) Appeals from denial of tax exemption application by the department of revenue pursuant to RCW 84.36.850.
     (k) Appeals pursuant to RCW 84.40.038(3).
     (l) Appeals relating to income tax deficiencies and refunds including penalties and interest under Title 82A RCW.
     (2) Except as otherwise specifically provided by law hereafter, the provisions of RCW 1.12.070 shall apply to all notices of appeal filed with the board of tax appeals.

Sec. 119   RCW 82.03.140 and 2000 c 103 s 1 are each amended to read as follows:
     In all appeals over which the board has jurisdiction under RCW 82.03.130, a party taking an appeal may elect either a formal or an informal hearing, such election to be made according to rules of practice and procedure to be promulgated by the board: PROVIDED, That nothing shall prevent the assessor or taxpayer, as a party to an appeal pursuant to RCW 84.08.130, within twenty days from the date of the receipt of the notice of appeal, from filing with the clerk of the board notice of intention that the hearing be a formal one: PROVIDED, HOWEVER, That nothing herein shall be construed to modify the provisions of RCW 82.03.190: AND PROVIDED FURTHER, That upon an appeal under RCW 82.03.130(1) (e) or (l), the director of revenue may, within ten days from the date of its receipt of the notice of appeal, file with the clerk of the board notice of its ((intention that the hearing be held pursuant to chapter 34.05 RCW)) election of a formal hearing. In the event that appeals are taken from the same decision, order, or determination, as the case may be, by different parties and only one of such parties elects a formal hearing, a formal hearing shall be granted.

NEW SECTION.  Sec. 120   CAPTIONS. Captions as used in this act constitute no part of the law.

NEW SECTION.  Sec. 121   SEVERABILITY CLAUSE. If any provision of this act or its application to any person or circumstance is held invalid, the remainder of the act or the application of the provision to other persons or circumstances is not affected.

NEW SECTION.  Sec. 122   This act takes effect January 1, 2006.

NEW SECTION.  Sec. 123   CODIFICATION. Sections 101 through 117 and 120 through 122 of this act constitute a new title, to be codified as Title 82A RCW.