BILL REQ. #:  H-3036.4 

Read first time 01/15/14.   Referred to Committee on Finance.

     AN ACT Relating to providing business and occupation tax relief by allowing businesses to deduct cost of goods sold, compensation, or a portion of gross income; adding a new section to chapter 82.04 RCW; and providing an effective date.

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

NEW SECTION.  Sec. 1   A new section is added to chapter 82.04 RCW to read as follows:
     (1) In computing tax under this chapter, a person may deduct the greater of:
     (a) Thirty percent of gross income;
     (b) Cost of goods sold; or
     (c) Compensation, but not to exceed twenty-five thousand dollars for each month in the tax reporting period.
     (2) The definitions in this subsection apply throughout this section unless the context clearly requires otherwise.
     (a) "Benefits compensation" means the cost of all benefits, to the extent deductible for federal income tax purposes, the person provides to its officers, directors, owners, partners, and employees, including workers' compensation benefits, health care, employer contributions made to employees' health savings accounts, and retirement.
     (b) "Compensation" means wages and cash compensation and benefits compensation, paid to officers, directors, owners, partners, and employees of the person.
     (c)(i) "Cost of goods sold" means all direct costs of acquiring or producing the goods subject to tax under this chapter, including: (A) Labor costs; (B) cost of materials that are an integral part of specific property produced; (C) cost of materials that are consumed in the ordinary course of performing production activities; (D) handling costs, including costs attributable to processing, assembling, repackaging, and inbound transportation costs; (E) storage costs, including the costs of carrying, storing, or warehousing property; (F) depreciation, depletion, and amortization, reported on the federal income tax return on which the report under this chapter is based, to the extent associated with and necessary for the production of goods, including recovery described by 26 U.S.C. Sec. 197 of the federal internal revenue code; (G) the cost of renting or leasing equipment, facilities, or real property directly used for the production of the goods, including pollution control equipment and intangible drilling and dry hole costs; (H) the cost of repairing and maintaining equipment, facilities, or real property directly used for the production of the goods, including pollution control devices; (I) costs attributable to research, experimental, engineering, and design activities directly related to the production of the goods, including all research or experimental expenditures described by 26 U.S.C. Sec. 174 of the federal internal revenue code; (J) geological and geophysical costs incurred to identify and locate property that has the potential to produce minerals; (K) taxes paid in relation to acquiring or producing any material, or taxes paid in relation to services that are a direct cost of production; (L) the cost of producing or acquiring electricity sold; and (M) a contribution to a partnership in which the taxable entity owns an interest that is used to fund activities, the costs of which would otherwise be treated as cost of goods sold of the partnership, but only to the extent that those costs are related to goods distributed to the taxable entity as goods-in-kind in the ordinary course of production activities rather than being sold.
     (ii) "Cost of goods sold" also includes the following costs in relation to the person's sale of goods: (A) Deterioration of the goods; (B) obsolescence of the goods; (C) spoilage and abandonment, including the costs of rework labor, reclamation, and scrap; (D) if the property is held for future production, preproduction direct costs allocable to the property, including costs of purchasing the goods and of storage and handling the goods; (E) postproduction direct costs allocable to the property; (F) the cost of insurance on a plant or a facility, machinery, equipment, or materials directly used in the production of the goods; (G) the cost of insurance on the produced goods; (H) the cost of utilities, including electricity, gas, and water, directly used in the production of the goods; (I) the costs of quality control, including replacement of defective components pursuant to standard warranty policies, inspection directly allocable to the production of the goods, and repairs and maintenance of goods; and (J) licensing or franchise costs, including fees incurred in securing the contractual right to use a trademark, corporate plan, manufacturing procedure, special recipe, or other similar right directly associated with the goods produced.
     (d) "Wages and cash compensation" means the amount entered in the medicare wages and tips box of internal revenue service form W-2 or any subsequent form with a different number or designation that substantially provides the same information. The term also includes, to the extent not otherwise included in this subsection (2)(d): (i) Net distributive income from a taxable entity treated as a partnership for federal income tax purposes, but only if the person receiving the distribution is a natural person; (ii) net distributive income from limited liability companies and corporations treated as S corporations for federal income tax purposes, but only if the person receiving the distribution is a natural person; (iii) stock awards and stock options deducted for federal income tax purposes; and (iv) net distributive income from a limited liability company treated as a sole proprietorship for federal income tax purposes, but only if the person receiving the distribution is a natural person.

NEW SECTION.  Sec. 2   This act takes effect July 1, 2014.