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NEW SECTION. Sec. 1. (1) The legislature finds that in 1935 the legislature enacted as RCW 82.04.320 a business and occupation tax exemption that applied to "any person in respect to insurance business upon which a tax based on gross premiums is paid to the state."(2) In 2024, in Envolve Pharmacy Solutions, Inc. v. Department of Revenue, 4 Wn.3d 142 (2024), the Washington supreme court construed the exemption to apply to an affiliate of an insurer. The court correctly reasoned the affiliate qualified for the business and occupation tax exemption because it was a person performing work in respect to insurance business upon which a premium tax had been paid. While the court's decision was correct on the facts before it, its interpretation of the business and occupation tax exemption leaves open the possibility an affiliate or other entity may claim the exemption merely on the basis of being paid by an insurer with premium funds subject to premium taxes, even if the affiliate or other entity is not engaged in insurance business.
(3) Therefore, the legislature intends to clarify the scope of the business and occupation tax exemption such that it applies to insurers and their affiliates in respect to insurance business activities, but does not apply to such entities or others for the purpose of conducting other kinds of business.
(4) The legislature further finds that on October 2, 2019, the department of revenue issued public guidance in the form of an interim guidance statement that explained, in part, that a person claiming the exemptions in RCW
82.04.320 must show proof that it paid premium tax to the state with respect to the gross income it claims as exempt from business and occupation tax. The supreme court's decision in
Envolve Pharmacy Solutions, Inc. forced the department to rescind that guidance.
(5) The legislature intends for this act to apply both prospectively and retroactively to tax periods beginning on or after October 2, 2019, the date that the department of revenue issued the interim guidance statement. By applying the act retroactively to October 2, 2019, the legislature intends to treat businesses that did not follow the department's guidance equally to those businesses that followed the guidance.
Sec. 2. RCW
82.04.320 and 2021 c 281 s 10 are each amended to read as follows:
(1) Except as otherwise provided in this section, this chapter does not apply to ((any person))an insurer or an affiliate of an insurer in respect to insurance business upon which a tax based on gross premiums is paid to the state by an insurer.
(2) ((The provisions of this section do 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.
(3) The provisions of this section do 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.
(4)))
The exemption in subsection (1) of this section also applies to gross premiums received by an insurer that are exempt from premium taxes under RCW 48.14.0201(6). (3) The exemption in subsection (1) of this section also applies to an insurer or an affiliate of an insurer for any consideration received by the insurer or affiliate for the granting of an annuity.
(4) The exemption in subsection (1) of this section does not apply to an affiliate of an insurer, or any other person, for payments received in connection with activities that are not insurance business activities as defined in this section.
(5) For purposes of this section, for periods preceding May 12, 2021, eligible captive insurers as defined in RCW
48.201.020 are deemed, in respect to their insurance business, to have paid a tax
under RCW 48.14.020 or 48.201.040 on ((
gross))
their receipt of premiums ((
to the state)).
((
(5)))
(6) Eligible captive insurers affiliated with a public institution of higher education that are exempt from paying a premium tax under RCW
48.201.040 are exempt from the tax imposed by this chapter in respect to their insurance business. For purposes of this subsection ((
(5)))
(6), the definitions in RCW
48.201.020 apply.
(7) The definitions in this subsection apply throughout this section unless the context clearly requires otherwise.
(a) "Affiliate" means a person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with another person.
(b)(i) "Insurance business" means activity performed by an insurer as defined in RCW 48.01.050, which relates to and includes the assumption of insurance risk, either directly or through reinsurance, upon which premiums or other considerations have been earned or received with respect to those risks. (ii) "Insurance business" also means activities regulated under Title 48 RCW. Examples of insurance business include, but are not limited to: (A) Setting rates for, and underwriting insurance policies;
(B) Investigating claims;
(C) Determining cause;
(D) Appraising insured property;
(E) Inspecting, evaluating, and testing insured, or prospective insured, property for risk of property loss;
(F) Processing, adjudicating, and paying claims for insurance benefits;
(G) Making coverage benefit determinations and handling internal grievances or appeals;
(H) Customer service and support for policyholders, subscribers, and their dependents; and
(I) Pursuing subrogation or reimbursement rights arising from insurance claims.
(iii) "Insurance business" does not include general business activities that are not regulated under Title 48 RCW including, but not limited to: (A) Cafeteria operations for employees;
(B) Building maintenance and janitorial services;
(C) Corporate security services;
(D) General information technology support or software development unrelated to regulated activities;
(E) Legal and accounting services unrelated to regulated activities;
(F) Human resources unrelated to regulated activities;
(G) Event planning and hospitality services, including conferences, retreats, and other entertainment events; and
(H) Real estate management and leasing unrelated to regulated activities.
(c) "Insurer" means a person that lawfully transacts insurance business in this state or qualifies as a "taxpayer" under RCW 48.14.0201. "Insurer" includes an insurance broker who pays premium taxes pursuant to chapter 48.14 or 48.15 RCW on behalf of insurance businesses. (d) "Premium" has the same meaning as in RCW 48.18.170. NEW SECTION. Sec. 3. This act does not affect any final judgment, no longer subject to appeal, entered by a court of competent jurisdiction before the effective date of section 2 of this act.
NEW SECTION. Sec. 4. Section 2 of this act applies both prospectively and retroactively to October 2, 2019."
(2) Provides the B&O insurance premium exemption does not apply to an affiliate of an insurer, or any other person, for payments received in connection with activities that are not insurance business activities.
(3) Defines the terms "affiliate," and "insurer," and removes the definition for the term "person."
(4) Defines "insurance business" as activity performed by an insurer which relates to and includes the assumption of insurance risk, either directly or through reinsurance, upon which premiums or other considerations have been earned or received with respect to those risks. Provides that "insurance business" also means activities regulated under the title of state law that governs insurance. Includes a list of activities that qualify as insurance business and a list of activities that do not qualify as insurance business.
(6) Removes the section of the bill that directs the Department of Revenue (DOR) to waive penalties and interest on retroactively owed taxes, subject to certain requirements and exceptions.
(7) Removes the section of the bill that requires DOR to consult with the Office of the Insurance Commissioner to adopt rules and issue tax guidance.
(8) Removes the section of the bill that creates a new exemption from the workforce education investment surcharge for qualifying insurers who report and pay insurance premium taxes to the state and persons exempt from premium taxes under state law.
(9) Modifies the bill's legislative findings and statements of intent by removing statements regarding tax loopholes, the purpose of the insurance premium exemption, the nature of the B&O tax, restoring parity between the exemption statute and its intent, consolidating exemption statutes, intent to not affect tax obligations for income received by an insurer in connection with annuities, and intent that certain enforcement actions by DOR before the bill's effective date remain valid.
(10) Modifies the bill's legislative findings by removing and revising content regarding the Washington Supreme Court's decision in the Envolve Pharmacy Solutions case, and by stating the Court's opinion was correctly reasoned but its interpretation of the insurance premium exemption requires further clarification.