Background: Sales and Use Tax. Sales tax is imposed on retail sales of most items of tangible personal property and some services, including construction and repair services. The use tax is imposed on items used in the state, the acquisition of which was not subject to the sales tax. Sales and use taxes are imposed by the state, counties, and cities. There are a number of sales and use tax exemptions, including machinery and equipment directly used in manufacturing.

FCC Definition of Broadband. The FCC requires companies receiving Connect America funding for fixed broadband to offer speeds of at least 10 megabits per second (Mbps) for downloads and 1 Mbps for uploads.

Connect America Fund. In 2011, the Federal Communication Commission (FCC) created the Connect America Fund to support the expansion of broadband internet capability to underserved areas of the nation. Underserved areas are identified at the census-block level. The FCC initially disbursed approximately $1.8 billion annually to a class of large telecommunications carriers known as price cap carriers. There are two price cap carriers in Washington: CenturyLink and Frontier.

In September 2015, the FCC announced that 10 telecommunications companies nationwide would receive approximately $9 billion over the next six years as part of CAF-II to expand broadband networks throughout rural areas of the U.S. Under CAF-II, the FCC funding will target census blocks that meet two criteria: where the cost of providing service according to the cost model exceeds $52.50 a month, and those that are not served by unsubsidized competitors offering service at speeds of at least 4 Mbps downstream and 1 Mbps upstream. Service providers accepting CAF-II funds will be required to build out broadband services to 40 percent of funded locations by the end of 2017, 60 percent by end of 2018, and 100 percent by the end of 2020.

CenturyLink and Frontier have made commitments and will receive funding over the next 6 years under CAF II. For Washington State, CenturyLink has committed to provide service to 58,961 homes or businesses and will receive $24.4 million. Frontier has committed to provide service to 19,713 homes or businesses and will receive $8.7 million.

Summary of Bill (Proposed Substitute): Creating a Business & Occupation (B&O) Tax Credit for Broadband Equipment. A B&O credit, including for sales taxes paid, is created for companies that make broadband investments in underserved areas from July 1, 2016, through June 30, 2021. The credit is equal to 50 percent of the capital costs associated with providing retail broadband service using qualified broadband equipment and is divided equally over 15 years. The total credits claimed may not exceed $50 million.

Defining Terms. "Qualified broadband equipment" means telecommunications network transmission equipment located in the state that is necessary for and primarily used to provide retail communications service by wire or radio with the capability to transmit data to and receive data from substantially all internet endpoints with minimum speeds of 10 Mbps downstream and 1 Mbps upstream.

"Underserved area" means any United States area having either no broadband access or limited broadband access. This designation is based on a request to the Department of Revenue presented by businesses seeking a tax credit and any information utilized by the FCC and the National Telecommunications and Information Administration.

Stating the Intent and Purpose of the Tax Incentives. A tax preference statement is included which states that the purpose of the incentives is to expand high-speed broadband service in underserved areas of Washington. If a review by the Joint Legislative Audit and Review Committee finds that the number of consumers receiving high-speed broadband service in underserved areas of Washington has increased by 10 percent in 10 years compared to the number of consumers receiving such service at the time of enactment, then the Legislature intends to extend the expiration date of the tax preference.