ENGROSSED HOUSE BILL 2487

ByRepresentative Macri; by request of Department of Revenue

AN ACT Relating to taxes imposed on insurers operating within the state; amending RCW 82.04.320; reenacting and amending RCW 82.04.299; adding a new section to chapter 82.04 RCW; creating new sections; repealing RCW 82.04.322; and providing an expiration date.

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

(2) The legislature further 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." The Washington supreme court, in Armstrong v. State, 61 Wn.2d 116 (1962), unanimously held that the purpose of the exemption was to prevent insurance businesses from paying two state taxes on the same income, not to create a means for noninsurers to avoid paying any state tax. The legislature affirms the sole purpose of this exemption is to prevent double taxation.

(3) The legislature further finds that the business and occupation tax is a tax on the gross receipts of most businesses in the state, subject to specific deductions and exemptions. The tax generally applies at each point of sale in the process of providing a good or service and on sales between affiliated businesses.

(4) The legislature further finds that, in Envolve Pharmacy Solutions, Inc. v. Department of Revenue, 4 Wn.3d 142 (2024), a majority of the Washington supreme court broadly construed the exemption in RCW 82.04.320 to permit pharmacy benefit managers, and likely other businesses that do not earn premium income and do not pay a premium tax, to avoid paying business and occupation tax on amounts they receive from insurance businesses that do pay premium tax, contrary to the purpose of the exemption as construed in Armstrong. The court relied in large part on the legislature's use of passive voice, rather than active voice, when it enacted the exemption in 1935. If left unchecked, the decision in Envolve Pharmacy Solutions, Inc. would create a large and unintended drain on the state's budget.

(5) Therefore, the legislature finds that it is necessary to restore parity between the language used in RCW 82.04.320 and the intended purpose of that business and occupation tax exemption by restating the exemption in active voice. To streamline the administration of the tax as applied to insurers, the legislature intends to consolidate the similar tax exemptions in RCW 82.04.320 and 82.04.322 into a single exemption. The legislature intends the clarification to the exemption in this act to have no impact on any tax obligation for income received by an insurer for the granting of an annuity, in accordance with RCW 48.14.020(1)(a), which states that such income is not a premium for the purpose of the insurance premium tax.

(6) 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.

(7) The legislature intends for section 2 of 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 section 2 of this 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. The legislature intends that enforcement actions by the department of revenue against persons governed by the exemption under RCW 82.04.322 before the effective date of this section remain valid.

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 in respect to insurance business upon which a tax based on gross premiums is paid to the state.

(4)))This chapter does not apply to insurance business activity performed by an insurer that is directly subject to the payment of insurance premium taxes in Washington state pursuant to chapter 48.14, 48.15, or 48.201 RCW. Only the person who paid the insurance premium tax can claim this exemption.

(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.

NEW SECTION.  Sec. 4. A new section is added to chapter 82.04 RCW to read as follows:

(1) Except as provided in subsection (5) of this section, the department must waive penalties and interest otherwise due under chapter 82.32 RCW, and allow any person who owes delinquent taxes due under this chapter to enter into a three-year repayment schedule for taxes owed, if all of the following conditions are met:

(a) The taxes owed, and any penalties and interest, are for delinquent taxes due under chapter 82.04 RCW as a result of a person taking the exemption under either RCW 82.04.320 or 82.04.322, or both, on gross income that is not subject to the insurance premiums tax under chapter 48.14 or 48.15 RCW; and

(b) The taxes owed, and any penalties and interest, are for delinquent taxes due on the gross income of the business between October 2, 2019, and March 31, 2026.

(2)(a) The taxpayer must submit a completed application for a penalty and interest waiver, and repayment schedule, under this section in a form and manner prescribed by the department.

(b) An application for a penalty and interest waiver, and repayment schedule, under this section must be submitted to the department on or before December 31, 2026.

(c) The taxpayer must remit full payment in accordance with the repayment schedule issued by the department. If payment is late or incomplete, additional interest and late payment penalties apply.

(3) A waiver of penalties and interest provided by this section does not apply to other delinquent taxes that are not directly related to the exemption under either RCW 82.04.320 or 82.04.322, or both.

(4) The tax liability for which a penalty and interest waiver, and repayment schedule, is requested under this section is subject to verification by the department as provided in RCW 82.32.050. This section does not preclude the assessment of taxes, penalties, and interest with respect to any amounts determined by the department to have been underpaid for any tax period for which the taxpayer previously received penalty and interest relief under this section.

(5) Penalties for evasion, negligence, and avoidance pursuant to RCW 82.32.090 are not eligible for the penalty and interest waiver under this section.

(6) This section expires January 1, 2029.

Sec. 5. RCW 82.04.299 and 2025 c 420 s 301 and 2025 c 401 s 5 are each reenacted and amended to read as follows:

(1)(a) Beginning with business activities occurring on or after April 1, 2020, in addition to the taxes imposed under RCW 82.04.290 (2) and (4), a workforce education investment surcharge is imposed on select advanced computing businesses.

(i) Beginning April 1, 2020, through December 31, 2025, the surcharge is equal to the gross income of the business subject to the tax under RCW 82.04.290 (2) and (4), multiplied by the rate of 1.22 percent.

(ii) Beginning January 1, 2026, the surcharge is equal to the gross income of the business subject to the tax under RCW 82.04.290 (2), multiplied by the rate of 7.5 percent.

(b) Except as provided in (e) of this subsection (1), in no case will the combined surcharge imposed under this subsection (1) paid by all members of an affiliated group be more than $75,000,000 annually, unless 50 percent or more of the worldwide gross revenue of all members of an affiliated group is from the payment of insurance premiums during the immediately preceding calendar year, in which case the combined surcharge imposed under this subsection (1) paid by all members of an affiliated group may be no more than $25,000,000 annually.

(c) For persons subject to the surcharge imposed under this subsection (1) that report under one or more tax classifications, the surcharge applies only to business activities taxed under RCW 82.04.290 (2) and (4).

(d) The surcharge imposed under this subsection (1) must be reported and paid on a quarterly basis in a manner as required by the department. Returns and amounts payable under this subsection (1) are due by the last day of the month immediately following the end of the reporting period covered by the return. All other taxes must be reported and paid as required under RCW 82.32.045.

(e)(i) To aid in the effective administration of the surcharge in this subsection (1), the department may require persons believed to be engaging in advanced computing or affiliated with a person believed to be engaging in advanced computing to disclose whether they are a member of an affiliated group and, if so, to identify all other members of the affiliated group subject to the surcharge.

(ii) If the department establishes, by clear, cogent, and convincing evidence, that one or more members of an affiliated group, with intent to evade the surcharge under this subsection (1), failed to fully comply with this subsection (1)(e), the department must assess against that person, or those persons collectively, a penalty equal to 50 percent of the amount of the total surcharge payable by all members of that affiliated group for the calendar year during which the person or persons failed to fully comply with this subsection (1)(e). The penalty under this subsection (1)(e) is in lieu of and not in addition to the evasion penalty under RCW 82.32.090(7).

(f) For the purposes of this subsection (1) the following definitions apply:

(i) "Advanced computing" means designing or developing computer software or computer hardware, whether directly or contracting with another person, including: Modifications to computer software or computer hardware; cloud computing services; or operating as a marketplace facilitator as defined by RCW 82.08.0531, an online search engine, or online social networking platform;

(ii) "Affiliate" and "affiliated" means a person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with another person;

(iii) "Affiliated group" means a group of two or more persons that are affiliated with each other;

(iv) "Cloud computing services" means on-demand delivery of computing resources, such as networks, servers, storage, applications, and services, over the internet;

(v) "Control" means the possession, directly or indirectly, of more than 50 percent of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting shares, by contract, or otherwise; ((and))

(vi) "Premium" has the same meaning as in RCW 48.18.170; and

(vii) "Select advanced computing business" means a person who is a member of an affiliated group with at least one member of the affiliated group engaging in the business of advanced computing, and the affiliated group has worldwide gross revenue of more than $25,000,000,000 during the immediately preceding calendar year. A person who is primarily engaged within this state in the provision of commercial mobile service, as that term is defined in 47 U.S.C. Sec. 332(d)(1), shall not be considered a select advanced computing business. A person who is primarily engaged in this state in the operation and provision of access to transmission facilities and infrastructure that the person owns or leases for the transmission of voice, data, text, sound, and video using wired telecommunications networks shall not be considered a select advanced computing business. A person that is primarily engaged in business as a "financial institution" as defined in RCW 82.04.29004, as that section existed on January 1, 2020, shall not be considered a select advanced computing business. For purposes of this subsection (1)(f)(((vi)))(vii), "primarily" is determined based on gross income of the business.

(2)(a) The workforce education investment surcharge under this section does not apply to:

(i) Any hospital as defined in RCW 70.41.020, including any hospital that comes within the scope of chapter 71.12 RCW if the hospital is also licensed under chapter 70.41 RCW; ((or))

(ii) A provider clinic offering primary care, multispecialty and surgical services, including behavioral health services, and any affiliate of the provider clinic if the affiliate is an organization that offers health care services or provides administrative support for a provider clinic, or is an independent practice association or accountable care organization;

(iv) A person that is exempt from premium taxes under RCW 48.14.0201(6) during the same reporting period.

(b) The exemptions under this subsection (2) do not apply to amounts received by any member of an affiliated group other than the businesses described in (a) of this subsection.

(c) For purposes of the exemption in (a)(ii) of this subsection:

(i) "Health care services" means services offered by health care providers relating to the prevention, cure, or treatment of illness, injury, or disease.

(ii) "Primary care" means wellness and prevention services and the diagnosis and treatment of health conditions.

(3) Revenues from the surcharge under this section must be deposited directly into the workforce education investment account established in RCW 43.79.195.

(4) Beginning in fiscal year 2028, and each year thereafter, when the number of qualified Washington state applicants exceeds the available enrollments by 100 at computer science engineering degree programs in four-year state universities, then a commensurate number of computer science and engineering degree enrollments at those state universities must be automatically added and funded for the surcharge imposed under this section to accommodate the additional demand.

(5) The department has the authority to determine through an audit or other investigation whether a person is subject to the surcharge imposed in this section.

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