Retail Sales and Use Tax and Business and Occupation Tax. Retail sales taxes are imposed on retail sales of most articles of tangible personal property, digital products, and some services. A retail sale is a sale to the final consumer or end user of the property, digital product, or service. If retail sales taxes were not collected when the user acquired the property, digital products, or services, then use tax applies to the value of property, digital product, or service when used in this state. Both the state and local governments impose sales and use taxes. The state sales and use tax rate is 6.5 percent; local sales and use tax rates vary from 0.5 percent to 3.9 percent, depending on the location. Unless specifically exempt, all transactions or uses of property or services in the tax base are subject to retail sales and use taxes.

The state business and occupation (B&O) tax is Washington's primary business tax. It is a gross receipts tax measured on the value of products, gross proceeds of sale, or gross income of the business. There are no deductions from the B&O tax for labor, materials, taxes, or other costs of doing business. A business may have more than one B&O tax rate, depending on the types of activities conducted. For example, the rate for most persons that conduct manufacturing or processing for hire activities is 0.484 percent. The state B&O tax includes a number of preferential tax rates, credits, exemptions, and deductions as well as several increased rates or surcharges. 

Tax Preferences. State law provides for a range of tax preferences that confer reduced tax liability upon a designated class of taxpayer. Tax preferences include tax exclusions, deductions, exemptions, preferential tax rates, deferrals, and credits. Washington has over 700 tax preferences, including a variety of sales and use tax exemptions. Legislation that establishes or expands a tax preference must include a tax preference performance statement that identifies the public policy objective of the preference, as well as specific metrics the Joint Legislative Audit and Review Committee can use to evaluate the effectiveness of the preference. All new tax preferences automatically expire after ten years unless an alternative expiration date is provided.

Tax Incentives for Semiconductor Industry. Semiconductor manufacturing is the process of creating integrated circuits or microchips. Semiconductor materials are essential for the construction of electronic devices and the semiconductor industry.

There are eight tax preferences related to the semiconductor materials manufacturing industry. Those tax preferences are provided for manufacturers of semiconductor materials and businesses that perform manufacturing services on semiconductor materials owned by others, known as processors for hire.

Six tax preferences were contingent on a manufacturer making at least a $1 billion investment in new buildings, machinery and equipment to site and operate a semiconductor microchip fabrication facility. Those preferences expired on January 1, 2024, because the contingent investment never occurred. The six preferences were:

• a sales and use tax exemption for labor, services, and sales of tangible personal property related to the construction of new buildings used for manufacturing semiconductor materials;
• a property tax exemption for machinery and equipment used in manufacturing semiconductor materials at a building exempt from sales and use tax;
• a $3,000 B&O tax job credit for each manufacturing production position that takes place in a new building exempt from sales and use tax;
• a preferential B&O tax rate of 0.275 percent for businesses of manufacturing semiconductor materials;
• a sales and use tax exemption for the sale of gases and chemicals used by a manufacturer in the manufacturing of semiconductor materials; and
• a B&O tax exemption for manufacturers of semiconductor microchips.

There are two tax preferences related to the semiconductor industry currently in effect:

• a preferential B&O rate of 0.275 percent for manufacturing semiconductor materials; and
• a sales and use tax exemption for purchases of gases and chemicals used in specific phases of the semiconductor production process. 

These two tax preferences require beneficiaries to maintain the number of persons employed at least 90 percent of the employment average for the previous three years, or to reimburse 50 percent of the benefits. Both preferences expire on December 1, 2028.

For the reduced B&O tax rates, semiconductor materials are defined in statute as silicon crystals, silicon ingots, raw polished semiconductor wafers, and compound semiconductor wafers. For the sales and use tax exemptions currently in effect, the definition is expanded to include materials that are used in solar energy systems, including solar grade silicon, silicon solar wafers, compound semiconductor solar wafers, silicon solar cells, and thin film solar devices.

The six tax preferences that expired on January 1, 2024, are reinstated, contingent on new investments in the semiconductor manufacturing industry. 

The expiration date is extended to January 1, 2034, for the two other preferences currently in effect for semiconductor manufacturing.

The bill exempts the tax preference performance statement requirements for the six tax preferences contingent on new investments. 

The bill includes an emergency clause and takes effect immediately.