SENATE BILL REPORT

SB 6078

BYSenators Vognild, Hayner, Fleming and Sellar; by request of Governor and Department of Revenue

Modifying certain business and occupation tax credits.

Senate Staff:Gary Benson (786-7715)

AS OF AUGUST 7, 1987

BACKGROUND:

The U.S. Supreme Court in Tyler Pipe v. State of Washington (aka National Can) ruled unconstitutional Washington's system of taxing manufacturing.  The court concluded that the multiple activities exemption results in unconstitutional discrimination against interstate commerce.  The case was remanded to the Washington Supreme Court for determination of remedies and refunds.

The B&O tax is a family of taxes on activities.  These activities include extracting, manufacturing, wholesaling, retailing and services.  Only activities performed in Washington are taxed.  A taxpayer can perform more than one activity.

To preclude double taxation of a taxpayer performing more than one activity in Washington, the law contains a multiple activities exemption.  It provides that a taxpayer subject to the wholesaling or retailing B&O tax with respect to a product is exempt from extracting or manufacturing B&O tax.  Thus, a Washington manufacturer selling its products in Washington is exempt from the manufacturing tax.  Because of the multiple activities exemption, only Washington manufacturers selling their products outside Washington pay the Washington manufacturing B&O tax.

The U.S. Supreme Court ruled the effect of the multiple activities exemption was an unconstitutional violation of the commerce clause of the federal Constitution.  The court found that the multiple activities exemption ensures that a Washington manufacturer selling in Washington pays one tax.  However, Washington manufacturers selling in Washington not only pay taxes in Washington but may pay B&O type taxes in other states.  Thus, there is a greater tax burden on interstate commerce than intrastate commerce.

This lawsuit commenced in 1984.  The 1985 Legislature enacted legislation contingent on the court ruling the multiple activities exemption invalid.  This legislation provided a "one-way credit" which allows a credit against Washington's manufacturing tax for selling B&O type taxes paid to other states.  No credits were provided for out-of-state manufacturers selling in Washington.  Language in the U.S. Supreme Court decision suggests the one-way credit may not be a sufficient remedy.

SUMMARY:

The credit enacted in 1985 is expanded to provide a credit to out-of-state manufacturers selling in Washington for B&O type manufacturing taxes paid to other states.  This same credit is extended to Washington manufacturers selling in Washington.  Allowing them to credit the manufacturing tax against the wholesaling or retailing B&O tax eliminates the need for the multiple activities exemption and it is repealed.

Revenue:    yes

Fiscal Note:      requested

Effective Date:The bill contains an emergency clause and takes effect immediately.