AN ACT Relating to excise taxes; amending RCW 82.04.080, 82.04.220, 82.04.300, 82.04.310, 82.04.320, 82.04.327, 82.04.330, 82.04.335, 82.04.337, 82.04.360, 82.04.390, 82.04.405, 82.04.408, 82.04.410, 82.04.419, 82.04.4281, 82.04.4286, 82.04.4287, 82.04.4294, 82.04.4284, 82.04.4329, 82.32.045, 70.93.160, 82.01.110, 82.32.060, 82.32.070, 82.34.050, and 84.40.405; reenacting and amending RCW 82.02.030; adding new sections to chapter 82.04 RCW; creating a new section; decodifying RCW 82.34.070; repealing RCW 82.04.010, 82.04.230, 82.04.240, 82.04.250, 82.04.255, 82.04.260, 82.04.270, 82.04.280, 82.04.290, 82.04.2901, 82.04.2904, 82.04.315, 82.04.325, 82.04.340, 82.04.350, 82.04.355, 82.04.365, 82.04.370, 82.04.380, 82.04.385, 82.04.395, 82.04.397, 82.04.415, 82.04.417, 82.04.418, 82.04.423, 82.04.425, 82.04.4271, 82.04.4282, 82.04.4283, 82.04.4285, 82.04.4288, 82.04.4289, 82.04.4291, 82.04.4292, 82.04.4293, 82.04.4295, 82.04.4296, 82.04.4297, 82.04.4298, 82.04.431, 82.04.432, 82.04.4322, 82.04.4324, 82.04.4326, 82.04.4328, 82.04.435, 82.04.440, 82.04.444, 82.04.445, 82.04.450, 82.04.460, 82.04.600, and 82.04.900; and providing an effective date.

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

INTRODUCTION

NEW SECTION. Sec. 101. FINDINGS AND PURPOSE. The legislature finds that the state's business and occupation tax results in double, triple, and quadruple taxation of goods produced in Washington, which increases the price of Washington goods and services and discriminates against independent, small, and new businesses and other sectors of the economy.

The legislature further finds that the business and occupation tax discourages economic development, growth, and job creation in the state and results in excessive taxation of investment in Washington.

The legislature further finds that the business and occupation tax base has been eroded by a series of preferential tax rates, exemptions, and deductions granted to certain businesses. This erosion has resulted in higher tax rates for businesses which do not have the benefit of exemptions and has created an increasingly inequitable tax structure.

The legislature declares the purpose of this chapter is to modify the state's existing business tax structure to provide a more fair and equitable system that treats all firms, goods, and services equally and encourages growth in the state by replacing the multiple taxation of investment in the state with a single tax.

NEW SECTION. Sec. 102. SHORT TITLE. This act may be known and cited as the Washington single rate business tax act. PART II

GENERAL DEFINITIONS

NEW SECTION. Sec. 201. APPLICATION OF DEFINITIONS. Unless the context clearly requires otherwise, the definitions in this part apply throughout this chapter.

NEW SECTION. Sec. 202. ACTIVE SHAREHOLDER. "Active shareholder" means a shareholder who receives at least ten thousand dollars in annual compensation, director's fees, or dividends from the business, and who owns at least five percent of the outstanding stock.

NEW SECTION. Sec. 203. CAPITAL ASSET. "Capital asset" means a tangible asset of a type which is eligible for depreciation, amortization, or accelerated capital cost recovery under the federal internal revenue code, as in effect on January 1, 1988.

NEW SECTION. Sec. 204. COMPENSATION. "Compensation" means wages, salaries, commissions, and any other form of remuneration paid to employees for personal services.

Sec. 205. Section 82.04.080, chapter 15, Laws of 1961 and RCW 82.04.080 are each amended to read as follows:

GROSS INCOME OF THE BUSINESS. "Gross income of the business" or "gross income" means the value proceeding or accruing by reason of the transaction of the business engaged in and includes gross proceeds of sales, compensation for the rendition of services, gains realized from trading in stocks, bonds, or other evidences of indebtedness, interest, discount, rents from real and personal property, royalties, fees, commissions, dividends, and other emoluments however designated, all without any deduction on account of the cost of tangible property sold, the cost of materials used, labor costs, interest, discount, delivery costs, taxes, or any other expense whatsoever paid or accrued other than as specifically allowed in this chapter, and without any deduction on account of losses. "Gross income of the business" or "gross income" also includes the gross proceeds of sales and dispositions of capital assets, as provided in section 602 of this 1988 act.

NEW SECTION. Sec. 206. MODIFIED GROSS INCOME. "Modified gross income" means gross income reduced by allowable exemptions and deductions, as calculated under section 302 or 303 of this act.

NEW SECTION. Sec. 207. MODIFIED SMALL BUSINESS INCOME. "Modified small business income" means modified gross income plus the following:

(1) Compensation and director's fees of active shareholders of a corporation.

(2) Compensation and director's fees of officers of a corporation.

NEW SECTION. Sec. 208. OFFICER. "Officer" means an officer of a corporation other than a corporation electing taxation under subchapter S of the internal revenue code, sections 1371 through 1379 of the internal revenue code, including the chairperson of the board, president, vice-president, secretary, and treasurer, or persons performing similar duties.

NEW SECTION. Sec. 209. PAID. "Paid" includes incurred for taxpayers permitted to use accrual basis accounting under rules adopted by the department.

NEW SECTION. Sec. 210. REPORTING PERIOD. "Reporting period" means the reporting period established for the taxpayer under RCW 82.32.045.

NEW SECTION. Sec. 211. SHAREHOLDER. "Shareholder" means a person who owns outstanding stock in the business. An individual shall be considered as owning the stock owned, directly or indirectly, by or for family members as defined by section 318(a)(1) of the internal revenue code. PART III

DETERMINATION OF TAX

Sec. 301. Section 82.04.220, chapter 15, Laws of 1961 and RCW 82.04.220 are each amended to read as follows:

SINGLE RATE BUSINESS TAX IMPOSED. There is levied and shall be collected from every person a tax for the act or privilege of engaging in business activities. Such tax shall be measured by the application of ((~~rates~~)) the rate of one and seven-tenths percent against ((~~value of products, gross proceeds of sales, or~~)) gross income of the business((~~, as the case may be~~)) reduced by exemptions and deductions, allocated, and apportioned as provided in section 302 or 303 of this 1988 act.

NEW SECTION. Sec. 302. CALCULATION OF TAX. Gross income subject to the tax imposed in RCW 82.04.220 is calculated as follows:

(1) From gross income, subtract amounts exempt from tax under part 4 of this chapter and amounts derived from business activities exempt under part 4 of this chapter.

(2) From the amount calculated under subsection (1) of this section, subtract amounts allowed as deductions under part 5 of this chapter. The result is modified gross income. Modified gross income shall never be less than zero.

(3) Allocate and apportion modified gross income as provided in part 7 of this chapter.

(4) From the amount allocated and apportioned to this state under subsection (3) of this section, subtract the deduction allowed in part 6 of this chapter. The result is subject to the tax imposed in RCW 82.04.220.

NEW SECTION. Sec. 303. ALTERNATIVE MAXIMUM TAX. (1) Each taxpayer may elect to calculate tax under this section rather than section 302 of this act. Under this section, gross income subject to the tax imposed in RCW 82.04.220 is calculated as follows:

(a) From gross income, subtract amounts exempt from tax under part 4 of this chapter and amounts derived from business activities exempt under part 4 of this chapter.

(b) Modified gross income is fifty percent of the amount calculated under subsection (1)(a) of this section.

(c) Allocate and apportion modified gross income as provided in part 7 of this chapter. The result is subject to the tax imposed in RCW 82.04.220.

(2) Deductions under parts 5 and 6 of this chapter are not allowed under this section.

NEW SECTION. Sec. 304. CARRY OVER. (1) Any portion of any deduction allowed in part 5 of this chapter which cannot be deducted in a reporting period without reducing modified gross income below zero may be carried forward and deducted in the next reporting period. This carry forward may be applied in successive reporting periods until the deduction is exhausted, but not past the first reporting period ending eleven months after the end of the reporting period in which the deduction first accrued.

(2) Any portion of the deduction allowed in section 601 of this act which cannot be deducted in a reporting period without reducing modified gross income below zero may be carried forward and deducted in the next reporting period. This carry forward may be applied in successive reporting periods until the deduction is exhausted.

NEW SECTION. Sec. 305. CREDIT‑-CONDITIONS. The credit provided in section 306 of this act is available to any person whose gross income does not exceed three million dollars for the tax year, subject to the following:

(1) An individual, a partnership, or a subchapter S corporation shall be disqualified if the individual, or any one partner of the partnership, or any one shareholder of the subchapter S corporation, receives more than sixty thousand dollars for the tax year as a distributive share of the modified small business income of the individual, the partnership, or the subchapter S corporation.

(2) A corporation other than a subchapter S corporation shall be disqualified if compensation and director's fees of a shareholder or officer exceed sixty thousand dollars for the tax year.

NEW SECTION. Sec. 306. CREDIT‑-DETERMINATION. (1) A person who qualifies pursuant to section 305 of this act shall be allowed a credit against the tax imposed in RCW 82.04.220. The credit shall be a percentage reduction in tax liability. The percentage shall be calculated as follows: One hundred percent minus the percentage computed by dividing modified small business income by forty-five percent of the gross income. If gross income exceeds two million dollars for the tax year, the credit shall be reduced by a fraction, the numerator of which is the amount of gross income over two million dollars and the denominator of which is one million dollars. The credit shall not exceed fifty percent of the tax liability imposed in RCW 82.04.220 for the tax year.

(2) An affiliated corporation as defined in this section 703 of this act and a controlled group of corporations or an entity under common control as defined by the internal revenue code shall not be allowed to take the credit allowed by this section unless the business activities of the entities are consolidated. PART IV

EXEMPTIONS

Sec. 401. Section 82.04.300, chapter 15, Laws of 1961 as last amended by section 213, chapter 3, Laws of 1983 and RCW 82.04.300 are each amended to read as follows:

MONTHLY GROSS. ((~~This chapter shall~~)) (1) The tax imposed in RCW 82.04.220 does not apply to any person ((~~engaging in any business activity taxable under RCW 82.04.230, 82.04.240, 82.04.250, 82.04.260, 82.04.270, 82.04.280 and 82.04.290 other than those whose value of products, gross proceeds of sales, or~~)) whose gross income of the business is less than ((~~one~~)) five thousand dollars per month: PROVIDED, That where one person engages in more than one business activity and the combined ((~~measures of the tax~~)) gross income applicable to such businesses equals or ((~~exceed one~~)) exceeds five thousand dollars per month, no exemption or deduction from the amount of tax is allowed by this section.

(2) Any person claiming exemption under the provisions of this section may be required to file returns even though no tax may be due: PROVIDED, FURTHER, That the department of revenue may allow exemptions, by general rule or regulation, in those instances in which quarterly, semiannual, or annual returns are permitted. Exemptions for such periods shall be equivalent in amount to the total of exemptions for each month of a reporting period.

Sec. 402. Section 82.04.310, chapter 15, Laws of 1961 and RCW 82.04.310 are each amended to read as follows:

PUBLIC UTILITIES. ((~~This chapter shall~~)) The tax imposed in RCW 82.04.220 does not apply to any person in respect to a business activity with respect to which tax liability is specifically imposed under the provisions of chapter 82.16 RCW.

Sec. 403. Section 82.04.320, chapter 15, Laws of 1961 and RCW 82.04.320 are each amended to read as follows:

INSURANCE BUSINESS. ((~~This chapter shall~~)) The tax imposed in RCW 82.04.220 does not apply to any person in respect to insurance business upon which a tax based on gross premiums is paid to the state: PROVIDED, That the provisions of this section shall not exempt any person engaging in the business of representing any insurance company, whether as general or local agent, or acting as broker for such companies: PROVIDED FURTHER, That the provisions of this section shall not exempt any bonding company from tax with respect to gross income derived from the completion of any contract as to which it is a surety, or as to any liability as successor to the liability of the defaulting contractor.

Sec. 404. Section 1, chapter 4, Laws of 1987 1st ex. sess. and RCW 82.04.327 are each amended to read as follows:

ADULT FAMILY HOMES. ((~~This chapter~~)) The tax imposed in RCW 82.04.220 does not apply to adult family homes which are licensed as such, or which are specifically exempt from licensing, under rules of the department of social and health services.

Sec. 405. Section 4, chapter 23, Laws of 1987 and RCW 82.04.330 are each amended to read as follows:

AGRICULTURE EXEMPTIONS. ((~~This chapter shall~~)) The tax imposed in RCW 82.04.220 does not apply to any person in respect to the business of growing or producing for sale upon the person's own lands or upon land in which the person has a present right of possession, any agricultural or horticultural produce or crop, or of raising upon the person's own lands or upon land in which the person has a present right of possession, any plantation Christmas tree or any animal, bird, fish, or insect, or the milk, eggs, wool, fur, meat, honey, or other substance obtained therefrom, or in respect to the sale of such products at wholesale by such grower, producer, or raiser thereof. This exemption shall not apply to any person selling such products at retail or using such products as ingredients in a manufacturing process; nor to the sale of any animal or substance obtained therefrom by a person in connection with the person's business of operating a stockyard or a slaughter or packing house; ((~~nor to any person in respect to the business of taking, cultivating, or raising timber;~~)) nor to any association of persons whatever, whether mutual, cooperative or otherwise, engaging in any business activity with respect to which tax liability is imposed under the provisions of this chapter. As used in this section, "fish" means fish which are cultivated or raised entirely within confined rearing areas on the person's own land or on land in which the person has a present right of possession.

Sec. 406. Section 1, chapter 145, Laws of 1965 ex. sess. and RCW 82.04.335 are each amended to read as follows:

AGRICULTURAL FAIRS. ((~~This chapter shall~~)) The tax imposed in RCW 82.04.220 does not apply to any business of any bona fide agricultural fair, if no part of the net earnings therefrom inures to the benefit of any stockholder or member of the association conducting the same: PROVIDED, That any amount paid for admission to any exhibit, grandstand, entertainment, or other feature conducted within the fair grounds by others shall be taxable under the provisions of this chapter, except as otherwise provided by law.

Sec. 407. Section 1, chapter 495, Laws of 1987 and RCW 82.04.337 are each amended to read as follows:

PROCESSED HOPS SHIPPED OUTSIDE THE STATE. ((~~This chapter shall~~)) The tax imposed in RCW 82.04.220 does not apply to amounts received by hop growers or dealers for hops which are shipped outside the state of Washington for first use, if those hops have been processed into extract, pellets, or powder in this state. This section does not exempt a processor or warehouser from taxation under this chapter on amounts charged for processing or warehousing.

Sec. 408. Section 82.04.360, chapter 15, Laws of 1961 and RCW 82.04.360 are each amended to read as follows:

EMPLOYEES. ((~~This chapter shall~~)) The tax imposed in RCW 82.04.220 does not apply to any person in respect to his employment in the capacity of an employee or servant as distinguished from that of an independent contractor.

Sec. 409. Section 82.04.390, chapter 15, Laws of 1961 and RCW 82.04.390 are each amended to read as follows:

SALE OF REAL ESTATE. ((~~This chapter shall~~)) (1) Except as provided in subsection (2) of this section, the tax imposed in RCW 82.04.220 does not apply to gross ((~~proceeds~~)) income derived from the sale of real estate. ((~~This however, shall not be construed to allow a deduction of~~))

(2) The following are not exempt under this section:

(a) Amounts received as commissions from the sale of real estate, nor as fees, handling charges, discounts, interest or similar financial charges resulting from, or relating to, real estate transactions; and

(b) The gross proceeds of sales or dispositions of capital assets subject to tax under section 602 of this 1988 act.

Sec. 410. Section 3, chapter 101, Laws of 1970 ex. sess. and RCW 82.04.405 are each amended to read as follows:

CREDIT UNIONS. ((~~This chapter shall~~)) The tax imposed in RCW 82.04.220 does not apply to the gross income of credit unions organized under the laws of this state or the United States.

Sec. 411. Section 25, chapter 161, Laws of 1983 and RCW 82.04.408 are each amended to read as follows:

HOUSING FINANCE COMMISSION. ((~~This chapter~~)) The tax imposed in RCW 82.04.220 does not apply to income received by the state housing finance commission under chapter 43.180 RCW.

Sec. 412. Section 82.04.410, chapter 15, Laws of 1961 as amended by section 15, chapter 149, Laws of 1967 ex. sess. and RCW 82.04.410 are each amended to read as follows:

HATCHING EGGS AND POULTRY. ((~~This chapter shall~~)) The tax imposed in RCW 82.04.220 does not apply to amounts derived by persons engaged in the production and sale of hatching eggs or poultry for use in the production for sale of poultry or poultry products.

Sec. 413. Section 3, chapter 66, Laws of 1983 1st ex. sess. and RCW 82.04.419 are each amended to read as follows:

GOVERNMENTS. ((~~This chapter shall~~)) The tax imposed in RCW 82.04.220 does not apply to amounts derived by any county, city, town, school district, or fire district activity, regardless of how financed, other than a utility or enterprise activity as defined by the state auditor pursuant to RCW 35.33.111 and 36.40.220 and upon which the tax imposed pursuant to this chapter had previously applied. Nothing contained in this section shall limit the authority of the legislature to authorize the imposition of such tax prospectively upon such activities as the legislature shall specifically designate.

Sec. 414. Section 2, chapter 37, Laws of 1980 and RCW 82.04.4281 are each amended to read as follows:

INTEREST AND DIVIDENDS. ((~~In computing tax there may be deducted from the measure of tax~~)) The tax imposed in RCW 82.04.220 does not apply to:

(1) Amounts derived by persons, other than those engaging in banking, loan, security, or other financial businesses, from investments or the use of money as such, if the investments or use of money are not related to business activities subject to the tax imposed in RCW 82.04.220; and ((~~also~~))

(2) Amounts derived as dividends ((~~by a parent from its subsidiary~~)) from affiliated corporations included in a combined report with the taxpayer under section 703 of this 1988 act.

Sec. 415. Section 7, chapter 37, Laws of 1980 and RCW 82.04.4286 are each amended to read as follows:

NONTAXABLE BUSINESS. ((~~In computing tax there may be deducted from the measure of tax~~)) The tax imposed in RCW 82.04.220 does not apply to amounts derived from business which the state is prohibited from taxing under the Constitution of this state or the Constitution or laws of the United States.

Sec. 416. Section 8, chapter 37, Laws of 1980 and RCW 82.04.4287 are each amended to read as follows:

HORTICULTURAL PRODUCTS. ((~~In computing tax there may be deducted from the measure of tax~~)) The tax imposed in RCW 82.04.220 does not apply to amounts derived by any person as compensation for the receiving, washing, sorting, and packing of fresh perishable horticultural products and the material and supplies used therein when performed for the person exempted in RCW 82.04.330, either as agent or as independent contractor.

Sec. 417. Section 14, chapter 37, Laws of 1980 and RCW 82.04.4294 are each amended to read as follows:

AGRICULTURAL LOANS. ((~~In computing tax there may be deducted from the measure of tax~~)) The tax imposed in RCW 82.04.220 does not apply to amounts derived as interest on loans to bona fide farmers and ranchers, producers or harvesters of aquatic products, or their cooperatives by a lending institution which is owned exclusively by its borrowers or members and which is engaged solely in the business of making loans and providing finance-related services to bona fide farmers and ranchers, producers or harvesters of aquatic products, their cooperatives, rural residents for housing, or persons engaged in furnishing farm-related or aquatic-related services to these individuals or entities.

NEW SECTION. Sec. 418. NONPROFIT ORGANIZATIONS. The tax imposed in RCW 82.04.220 does not apply to amounts which are exempt from federal income tax under subchapter F of chapter 1 of the federal internal revenue code, as in effect on January 1, 1988. Amounts which are subject to any federal tax specifically imposed under subchapter F of chapter 1 of the federal internal revenue code, as in effect on January 1, 1988, are not exempt under this section. PART V

DEDUCTIONS

Sec. 501. Section 5, chapter 37, Laws of 1980 and RCW 82.04.4284 are each amended to read as follows:

CREDIT LOSSES. In computing the tax imposed in RCW 82.04.220, there may be deducted from ((~~the measure of tax~~)) gross income the amount of credit losses actually sustained by taxpayers whose regular books of account are kept upon an accrual basis.

Sec. 502. Section 24, chapter 431, Laws of 1987 and RCW 82.04.4329 are each amended to read as follows:

HEALTH INSURANCE POOL MEMBERS‑-DEFICIT ASSESSMENTS. In computing the tax imposed in RCW 82.04.220, there may be deducted from the measure of tax the amount of any assessment against the taxpayer under RCW 48.41.010 through 48.41.210. Any portion of the deduction allowed in this section which cannot be deducted in a tax year without reducing taxable premiums below zero may be carried forward and deducted in successive years until the deduction is exhausted. Amounts deducted under RCW 48.14.022 may not be deducted under this section.

NEW SECTION. Sec. 503. PAYMENTS TO OTHERS. (1) In computing the tax imposed in RCW 82.04.220, deductions from gross income are allowed equal to amounts paid by the taxpayer during the reporting period for the acquisition or use of property, services, privileges, or facilities, other than items excluded in subsection (2) of this section. Deductions allowed under this section include, but are not limited to, the costs of:

(a) Inventory, stock in trade, and other property held by the taxpayer primarily for sale to customers in the ordinary course of business.

(b) Freight and postage.

(d) Advertising.

(e) Insurance, including but not limited to amounts paid for worker's compensation and unemployment compensation insurance.

(f) Travel expenses.

(g) Repairs.

(h) Dues and payments to business associations.

(i) Legal, accounting, and other professional services.

(j) Rents, royalties, lease payments, and other payments for the privilege of using or extracting any property to which the taxpayer does not have legal or equitable title.

(k) Miscellaneous supplies.

(l) Interest.

(2) The following are not allowed as deductions under this section, notwithstanding inclusion in subsection (1) of this section:

(a) Direct or indirect compensation of employees, including but not limited to, wages, salaries, commissions, bonuses, and any form of remuneration paid to employees for personal services.

(b) Payments on behalf of employees, including but not limited to payments for pensions, retirement annuities, profit-sharing plans, stock bonus plans, insurance (other than worker's compensation and unemployment insurance), and employees' taxes.

(d) Amounts paid by the taxpayer to itself or to an affiliated corporation included in a combined report with the taxpayer under section 703 of this act.

NEW SECTION. Sec. 504. TAXES. In computing the tax imposed in RCW 82.04.220, a deduction is allowed for taxes paid by the taxpayer during the reporting period, except:

(1) Taxes on or measured by income.

(2) Taxes for any purpose not related to the taxpayer's trade or business.

(3) The tax imposed in RCW 82.04.220.

NEW SECTION. Sec. 505. EXCESS COMPENSATION. (1) In computing the tax imposed by RCW 82.04.220, a deduction is allowed equal to the excess compensation paid by the taxpayer during the reporting period.

(2) As used in this section:

(a) "Excess compensation" means the compensation paid by the taxpayer during the reporting period, minus sixty-five percent of the taxpayer's base income for the reporting period.

(b) "Base income" means that portion of the taxpayer's gross income subject to the tax imposed in RCW 82.04.220, computed without regard to any deduction under this section.

NEW SECTION. Sec. 506. DEDUCTIONS LIMITED. (1) The deductions allowed in this chapter are limited to amounts paid in respect to gross income or business activities of the taxpayer which are not exempt from the tax imposed in RCW 82.04.220, as determined under rules adopted by the department.

(2) Deductions which would have the effect of duplicating an amount already subtracted from gross income are not allowed under this chapter. PART VI

CAPITAL ASSETS

NEW SECTION. Sec. 601. CAPITAL DEDUCTION. In computing the tax imposed in RCW 82.04.220, a deduction is allowed equal to the cost, including fabrication and installation, paid during the reporting period, of capital assets physically located in Washington.

NEW SECTION. Sec. 602. DISPOSITION OF CAPITAL ASSETS. (1) Gross income includes the gross proceeds of sales or dispositions of capital assets in respect to which a deduction was claimed under section 601 of this act, regardless of whether the sale or disposition was made in the course of business. If the gross proceeds received by the taxpayer at the time of the sale or disposition under this section do not represent the true value of the capital asset, or if the taxpayer does not receive any gross proceeds, the amount included in gross income shall be determined as nearly as possible according to the fair market value of property of like quality and character under rules adopted by the department.

(2) As used in this section, "disposition" means the use of the capital asset by the taxpayer or any other person in an activity the gross income of which is exempt from the tax imposed in RCW 82.04.220, as determined under rules adopted by the department.

NEW SECTION. Sec. 603. RESEARCH AND DEVELOPMENT. (1) In computing the tax imposed in RCW 82.04.220, a deduction is allowed equal to qualified research expenses paid by the taxpayer during the reporting period, except that the following are not deductible under this section:

(a) Amounts paid in respect to qualified research conducted outside this state.

(b) Amounts paid in respect to qualified services performed outside this state.

(2) As used in this section, "qualified research expenses", "qualified research", and "qualified services" have the meanings given in section 44F of the federal internal revenue code, as in effect on January 1, 1988. PART VII

ALLOCATION AND APPORTIONMENT

NEW SECTION. Sec. 701. ALLOCATION AND APPORTIONMENT REQUIRED. Each taxpayer having modified gross income from business activity which is taxable both within and without this state shall allocate and apportion modified gross income in accordance with rules adopted by the department. The rules shall, as far as the department deems practicable, be consistent with this chapter and RCW 82.56.010. In developing the rules, the department shall also give appropriate consideration to any uniform rules adopted by the multistate tax commission under Article VII of the multistate tax compact, and to the rules of other states in which taxpayers are also taxable.

NEW SECTION. Sec. 702. ADDITIONAL FACTORS. If the allocation and apportionment requirements of the department's rules do not result in a fair representation of the extent of the taxpayer's business activity in this state, the taxpayer may petition for or the department may require, in respect to all or any part of the taxpayer's business activity, if reasonable:

(1) Separate accounting;

(2) The exclusion of any one or more of the factors;

(3) The inclusion of one or more additional factors which will fairly represent the taxpayer's business activity in this state; or

(4) The employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer's income.

NEW SECTION. Sec. 703. COMBINED REPORT. (1) The department may permit or require an affiliated corporation that is subject to taxation under this chapter and that is a part of a unitary group of affiliated corporations to file a combined report covering the unitary operation of the group. The report shall contain such information as shall be designated in rules adopted by the department. If the department permits, requires, or prohibits the filing of a combined report for one or more corporations, it is not thereby bound to permit, require, or prohibit the filing of a combined report for any other corporation or group of corporations.

(2) As used in this section, "affiliated corporation" means a corporation that is a member of a group of two or more corporations with a common owner or owners, either corporate or noncorporate, when more than fifty percent of the voting stock of each member corporation is directly or indirectly owned by the common owner or owners or by one or more of the member corporations. "Affiliated corporation" does not include a corporation organized under the laws of a foreign country, or a corporation organized under the laws of any state or the United States which is domiciled in a foreign country.

(3) An affiliated corporation is a part of a unitary group when it is engaged in business activities which are integrated with, dependent upon, or which contribute to the business activities of the group as a whole, and the business activities of the group are carried on and are taxable in more than one state.

(4) The income attributable to the Washington activities of an affiliated corporation which is a part of a unitary group of affiliated corporations shall be determined by the apportionment of the entire business income of the unitary group and the allocation of nonbusiness income of the corporation, using the factors and methods in this part and the rules of the department. PART VIII

MISCELLANEOUS

Sec. 801. Section 1, chapter 7, Laws of 1981 as last amended by section 63, chapter 3, Laws of 1983 2nd ex. sess. and RCW 82.32.045 are each amended to read as follows:

RETURNS AND DUE DATES. (1) Except as otherwise provided in this chapter, payments of the taxes imposed under chapters ((~~82.04,~~)) 82.08, 82.12, 82.14, and 82.16 RCW, along with reports and returns on forms prescribed by the department, are due monthly within twenty-five days after the end of the month in which the taxable activities occur.

(2) The department of revenue may relieve any taxpayer or class of taxpayers from the obligation of remitting monthly and may require the return to cover other longer reporting periods, but in no event may returns be filed for a period greater than one year. For these taxpayers, tax payments are due on or before the last day of the month next succeeding the end of the period covered by the return.

(3) The department of revenue may also require verified annual returns from any taxpayer, setting forth such additional information as it may deem necessary to correctly determine tax liability.

(4) Payments of tax imposed under chapter 82.04 RCW, along with reports and returns on forms prescribed by the department, are due on the last day of the fourth month after the end of the taxpayer's tax year. Each taxpayer who reasonably expects to receive gross income taxed under chapter 82.04 RCW in excess of five hundred thousand dollars during the tax year shall file estimated returns and pay estimated tax for each month in the tax year. Interest and penalties shall be assessed under this chapter for an estimated payment of tax unless the estimated payment is at least one-twelfth of a reasonable estimate of tax liability for the tax year and the sum of all estimated payments for the tax year are at least ninety percent of the actual tax liability for the tax year.

Sec. 802. Section 16, chapter 307, Laws of 1971 ex. sess. and RCW 70.93.160 are each amended to read as follows:

APPLICATION OF CHAPTERS 82.04 AND 82.32 RCW TO THIS CHAPTER‑-EXCEPTIONS. All of the provisions of chapters 82.04 and 82.32 RCW such as they apply are incorporated herein except RCW 82.04.220 ((~~through 82.04.290,~~)) and 82.04.330.

Sec. 803. Section 4, chapter 157, Laws of 1980 and RCW 82.01.110 are each amended to read as follows:

TAX EXEMPTION IMPACT REPORT. Prior to the start of the regular session each year, the director shall submit a tax exemption impact report to the legislature estimating the revenue foregone as a result of the exemptions under RCW ((~~82.04.325,~~)) 84.36.490((,)) and 82.29A.135.

Sec. 804. Section 31, chapter 35, Laws of 1982 1st ex. sess. as last amended by section 4, chapter 80, Laws of 1987 and by section 15, chapter 472, Laws of 1987 and by section 6, chapter 9, Laws of 1987 1st ex. sess. and RCW 82.02.030 are each reenacted and amended to read as follows:

ADDITIONAL TAX RATES. (1) The rate of the additional taxes under RCW 54.28.020(2), 54.28.025(2), 66.24.210(2), 66.24.290(2), ((~~82.04.2901,~~)) 82.16.020(2), 82.26.020(2), 82.27.020(5), 82.29A.030(2), and 82.44.020(6) shall be seven percent; and

(2) The rate of the additional taxes under RCW 82.08.150(4) shall be fourteen percent.

Sec. 805. Section 82.32.060, chapter 15, Laws of 1961 as last amended by section 4, chapter 95, Laws of 1979 ex. sess. and RCW 82.32.060 are each amended to read as follows:

EXCESS PAYMENT‑-CREDIT OR REFUND‑-PAYMENT OF JUDGMENTS FOR REFUND. If, upon receipt of an application by a taxpayer for a refund or for an audit of his records, or upon an examination of the returns or records of any taxpayer, it is determined by the department that within the statutory period for assessment of taxes prescribed by RCW 82.32.050 a tax has been paid in excess of that properly due, the excess amount paid within such period shall be credited to the taxpayer's account or shall be refunded to the taxpayer, at his option. No refund or credit shall be made for taxes paid more than four years prior to the beginning of the calendar year in which the refund application is made or examination of records is completed.

Notwithstanding the foregoing limitations there shall be refunded or credited to taxpayers engaged in the performance of United States government contracts or subcontracts the amount of any tax paid, measured by that portion of the amounts received from the United States, which taxpayer is required by contract or applicable federal statute to refund or credit to the United States, if claim for such refund is filed by the taxpayer with the department within one year of the date that the amount of the refund or credit due to the United States is finally determined and filed within four years of the date on which the tax was paid: PROVIDED, That no interest shall be allowed on such refund.

Any such refunds shall be made by means of vouchers approved by the department and by the issuance of state warrants drawn upon and payable from such funds as the legislature may provide.

Any judgment for which a recovery is granted by any court of competent jurisdiction, not appealed from, for tax, penalties, and interest which were paid by the taxpayer, and costs, in a suit by any taxpayer shall be paid in like manner, upon the filing with the department of a certified copy of the order or judgment of the court. ((~~Except as to the credits in computing tax authorized by RCW 82.04.435,~~)) Interest at the rate of three percent per annum shall be allowed by the department and by any court on the amount of any refund or recovery allowed to a taxpayer for taxes, penalties, or interest paid by him after May 1, 1949, and interest at the same rate shall be allowed on any judgment recovered by a taxpayer for taxes, penalties, or interest paid after such date.

Sec. 806. Section 82.32.070, chapter 15, Laws of 1961 as last amended by section 221, chapter 3, Laws of 1983 and RCW 82.32.070 are each amended to read as follows:

RECORDS TO BE PRESERVED‑-EXAMINATION‑-ESTOPPEL TO QUESTION ASSESSMENT. Every person liable for any fee or tax imposed by chapters 82.04 through 82.27 RCW shall keep and preserve, for a period of five years, suitable records as may be necessary to determine the amount of any tax for which he may be liable, which records shall include copies of all federal income tax and state tax returns and reports made by him. All his books, records, and invoices shall be open for examination at any time by the department of revenue. In the case of an out-of-state person or concern which does not keep the necessary books and records within this state, it shall be sufficient if it produces within the state such books and records as shall be required by the department of revenue, or permits the examination by an agent authorized or designated by the department of revenue at the place where such books and records are kept. Any person who fails to comply with the requirements of this section shall be forever barred from questioning, in any court action or proceedings, the correctness of any assessment of taxes made by the department of revenue based upon any period for which such books, records, and invoices have not been so kept and preserved.

((Any person claiming a credit against the tax imposed by chapter 82.04 RCW by reason of the provisions of RCW 82.04.435 shall keep and preserve until the claim has been verified or allowed by the department of revenue sufficient books, records and invoices to prove the right to and amount of such claim for credit, and no such claim shall be allowed by the department of revenue unless such books, records and invoices have been kept and preserved.))

Sec. 807. Section 5, chapter 139, Laws of 1967 ex. sess. as amended by section 1, chapter 158, Laws of 1975 1st ex. sess. and RCW 82.34.050 are each amended to read as follows:

ORIGINAL ACQUISITION OF FACILITY EXEMPT FROM SALES AND USE TAXES‑-ELECTION TO TAKE TAX CREDIT IN LIEU OF EXEMPTION. (1) The original acquisition of a facility by the holder of a certificate shall be exempt from sales tax imposed by chapter 82.08 RCW and use tax imposed by chapter 82.12 RCW when the due date for payment of such taxes is subsequent to the effective date of the certificate: PROVIDED, That the exemption of this section shall not apply to servicing, maintenance, repairs, and replacement of parts after a facility is complete and placed in operation. Sales and use taxes paid by a holder of a certificate with respect to expenditures incurred for acquisition of a facility prior to the issuance of a certificate covering such facility may be claimed as a tax credit as provided in subsection (2) of this section.

(2) Subsequent to July 30, 1967 the holder of the certificate may, in lieu of accepting the tax exemption provided for in this section, elect to take a tax credit in the total amount of the exemption for the facility covered by such certificate against any future taxes to be paid pursuant to chapters 82.04, 82.12 and 82.16 RCW((~~: PROVIDED, That on and after July 30, 1967 if such person elects to take a tax credit for a facility under this subsection he may not take further credit under RCW 82.04.435~~)).

Sec. 808. Section 9, chapter 169, Laws of 1974 ex. sess. as last amended by section 156, chapter 7, Laws of 1985 and RCW 84.40.405 are each amended to read as follows:

BUSINESS INVENTORIES, AGRICULTURAL PROPERTY TAXES‑-CREDITS, EXEMPTIONS‑-RULES AND REGULATIONS, PROCEDURES. The department of revenue shall promulgate such rules and regulations, and prescribe such procedures as it deems necessary to carry out RCW ((~~82.04.444, 82.04.445,~~)) 84.36.470, 84.36.473, 84.36.475, 84.36.477, 84.09.080, and 84.52.015, and this section.

NEW SECTION. Sec. 809. SECTION DECODIFIED. RCW 82.34.070 is decodified.

NEW SECTION. Sec. 810. SECTIONS REPEALED. The following acts or parts of acts are each repealed:

(1) Section 82.04.010, chapter 15, Laws of 1961 and RCW 82.04.010;

(2) Section 82.04.230, chapter 15, Laws of 1961, section 7, chapter 149, Laws of 1967 ex. sess., section 33, chapter 262, Laws of 1969 ex. sess., section 2, chapter 281, Laws of 1971 ex. sess. and RCW 82.04.230;

(3) Section 82.04.240, chapter 15, Laws of 1961, section 5, chapter 173, Laws of 1965 ex. sess., section 8, chapter 149, Laws of 1967 ex. sess., section 34, chapter 262, Laws of 1969 ex. sess., section 3, chapter 281, Laws of 1971 ex. sess., section 1, chapter 196, Laws of 1979 ex. sess., section 1, chapter 172, Laws of 1981 and RCW 82.04.240;

(4) Section 82.04.250, chapter 15, Laws of 1961, section 9, chapter 149, Laws of 1967 ex. sess., section 35, chapter 262, Laws of 1969 ex. sess., section 2, chapter 186, Laws of 1971 ex. sess., section 4, chapter 281, Laws of 1971 ex. sess., section 2, chapter 172, Laws of 1981 and RCW 82.04.250;

(5) Section 3, chapter 65, Laws of 1970 ex. sess., section 1, chapter 9, Laws of 1983, section 1, chapter 3, Laws of 1983 2nd ex. sess., section 2, chapter 32, Laws of 1985 and RCW 82.04.255;

(6) Section 1, chapter 139, Laws of 1987 and RCW 82.04.260;

(7) Section 82.04.270, chapter 15, Laws of 1961, section 11, chapter 149, Laws of 1967 ex. sess., section 37, chapter 262, Laws of 1969 ex. sess., section 4, chapter 186, Laws of 1971 ex. sess., section 6, chapter 281, Laws of 1971 ex. sess., section 4, chapter 172, Laws of 1981 and RCW 82.04.270;

(8) Section 2, chapter 8, Laws of 1970 ex. sess., section 7, chapter 281, Laws of 1971 ex. sess., section 5, chapter 299, Laws of 1971 ex. sess., section 3, chapter 90, Laws of 1975 1st ex. sess., section 1, chapter 132, Laws of 1983, section 2, chapter 226, Laws of 1986 and RCW 82.04.280;

(9) Section 82.04.290, chapter 15, Laws of 1961, section 2, chapter 28, Laws of 1963 ex. sess., section 14, chapter 149, Laws of 1967 ex. sess., section 39, chapter 262, Laws of 1969 ex. sess., section 4, chapter 65, Laws of 1970 ex. sess., section 8, chapter 281, Laws of 1971 ex. sess., section 212, chapter 3, Laws of 1983, section 2, chapter 9, Laws of 1983, section 2, chapter 3, Laws of 1983 2nd ex. sess., section 3, chapter 32, Laws of 1985 and RCW 82.04.290;

(10) Section 4, chapter 32, Laws of 1985 and RCW 82.04.2901;

(11) Section 3, chapter 9, Laws of 1983, section 3, chapter 3, Laws of 1983 2nd ex. sess., section 5, chapter 32, Laws of 1985 and RCW 82.04.2904;

(12) Section 7, chapter 95, Laws of 1982 and RCW 82.04.315;

(13) Section 13, chapter 196, Laws of 1979 ex. sess., section 3, chapter 157, Laws of 1980, section 2, chapter 371, Laws of 1985 and RCW 82.04.325;

(14) Section 82.04.340, chapter 15, Laws of 1961 and RCW 82.04.340;

(15) Section 82.04.350, chapter 15, Laws of 1961 and RCW 82.04.350;

(16) Section 17, chapter 111, Laws of 1979 and RCW 82.04.355;

(17) Section 7, chapter 196, Laws of 1979 ex. sess. and RCW 82.04.365;

(18) Section 82.04.370, chapter 15, Laws of 1961, section 4, chapter 293, Laws of 1961 and RCW 82.04.370;

(19) Section 82.04.380, chapter 15, Laws of 1961 and RCW 82.04.380;

(20) Section 3, chapter 81, Laws of 1970 ex. sess., section 1, chapter 134, Laws of 1972 ex. sess. and RCW 82.04.385;

(21) Section 12, chapter 196, Laws of 1979 ex. sess. and RCW 82.04.395;

(22) Section 14, chapter 196, Laws of 1979 ex. sess. and RCW 82.04.397;

(23) Section 10, chapter 173, Laws of 1965 ex. sess. and RCW 82.04.415;

(24) Section 1, chapter 156, Laws of 1969 ex. sess. and RCW 82.04.417;

(25) Section 2, chapter 66, Laws of 1983 1st ex. sess. and RCW 82.04.418;

(26) Section 5, chapter 66, Laws of 1983 1st ex. sess. and RCW 82.04.423;

(27) Section 82.04.425, chapter 15, Laws of 1961, section 9, chapter 173, Laws of 1965 ex. sess., section 78, chapter 37, Laws of 1980 and RCW 82.04.425;

(28) Section 1, chapter 74, Laws of 1981 and RCW 82.04.4271;

(29) Section 3, chapter 37, Laws of 1980 and RCW 82.04.4282;

(30) Section 4, chapter 37, Laws of 1980 and RCW 82.04.4283;

(31) Section 6, chapter 37, Laws of 1980 and RCW 82.04.4285;

(32) Section 9, chapter 37, Laws of 1980 and RCW 82.04.4288;

(33) Section 10, chapter 37, Laws of 1980, section 2, chapter 178, Laws of 1981 and RCW 82.04.4289;

(34) Section 11, chapter 37, Laws of 1980 and RCW 82.04.4291;

(35) Section 12, chapter 37, Laws of 1980 and RCW 82.04.4292;

(36) Section 13, chapter 37, Laws of 1980 and RCW 82.04.4293;

(37) Section 15, chapter 37, Laws of 1980 and RCW 82.04.4295;

(38) Section 16, chapter 37, Laws of 1980 and RCW 82.04.4296;

(39) Section 17, chapter 37, Laws of 1980 and RCW 82.04.4297;

(40) Section 18, chapter 37, Laws of 1980 and RCW 82.04.4298;

(41) Section 6, chapter 196, Laws of 1979 ex. sess., section 80, chapter 37, Laws of 1980, section 1, chapter 66, Laws of 1983 1st ex. sess., section 3, chapter 431, Laws of 1985, section 6, chapter 261, Laws of 1986 and RCW 82.04.431;

(42) Section 17, chapter 149, Laws of 1967 ex. sess. and RCW 82.04.432;

(43) Section 1, chapter 140, Laws of 1981 and RCW 82.04.4322;

(44) Section 2, chapter 140, Laws of 1981 and RCW 82.04.4324;

(45) Section 3, chapter 140, Laws of 1981 and RCW 82.04.4326;

(46) Section 6, chapter 140, Laws of 1981, section 7, chapter 471, Laws of 1985 and RCW 82.04.4328;

(47) Section 26, chapter 173, Laws of 1965 ex. sess., section 1, chapter 89, Laws of 1967 ex. sess., section 1, chapter 257, Laws of 1969 ex. sess., section 6, chapter 299, Laws of 1971 ex. sess. and RCW 82.04.435;

(48) Section 82.04.440, chapter 15, Laws of 1961, section 12, chapter 173, Laws of 1965 ex. sess., section 16, chapter 149, Laws of 1967 ex. sess., section 5, chapter 172, Laws of 1981, section 1, chapter 190, Laws of 1985, section 2, chapter 3, Laws of 1987 2nd ex. sess. and RCW 82.04.440;

(49) Section 5, chapter 169, Laws of 1974 ex. sess. and RCW 82.04.444;

(50) Section 6, chapter 169, Laws of 1974 ex. sess. and RCW 82.04.445;

(51) Section 82.04.450, chapter 15, Laws of 1961, section 42, chapter 278, Laws of 1975 1st ex. sess., section 3, chapter 55, Laws of 1983 1st ex. sess. and RCW 82.04.450;

(52) Section 82.04.460, chapter 15, Laws of 1961, section 9, chapter 291, Laws of 1975 1st ex. sess., section 28, chapter 3, Laws of 1983 2nd ex. sess., section 154, chapter 7, Laws of 1985 and RCW 82.04.460;

(53) Section 8, chapter 266, Laws of 1979 ex. sess. and RCW 82.04.600; and

(54) Section 82.04.900, chapter 15, Laws of 1961 and RCW 82.04.900.

NEW SECTION. Sec. 811. SAVINGS. This act shall not be construed as affecting any existing right acquired or liability or obligation incurred under the sections amended or repealed in this act or under any rule, regulation, or order adopted under those sections, nor as affecting any proceeding instituted under those sections.

NEW SECTION. Sec. 812. SEVERABILITY. (1) 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.

(2) The tax imposed in RCW 82.04.220 shall not be affected by the invalidity of one or more deductions or exemptions, even if the result is the imposition of the tax, at the rate specified in RCW 82.04.220, upon the entire gross income of a taxpayer.

NEW SECTION. Sec. 813. CAPTIONS NO PART OF LAW. Captions as used in this chapter constitute no part of the law.

NEW SECTION. Sec. 814. CODIFICATION. Sections 101, 201 through 204, 206 through 211, 302 through 306, 418, 503 through 703, and 811 through 813 of this act are each added to chapter 82.04 RCW and shall be codified in the parts in which they appear in this act. RCW 82.04.020 through 82.04.212 are each recodified in part 2 of this act. Each section that is codified in chapter 82.04 RCW before the effective date of this act, and not repealed or expressly recodified by this act, shall be recodified in part 8 of this act.

NEW SECTION. Sec. 815. EFFECTIVE DATE‑-IMPLEMENTATION‑-RULES. This act shall take effect on January 1, 1990. The department of revenue shall propose rules necessary to administer this act and complete all notice, publishing, and hearing requirements under chapter 34.04 RCW for these rules as though the rules were to be finally adopted on January 1, 1989. However, the department shall not finally adopt these rules before July 1, 1989.