Current through Register Vol. 24-06, March 15, 2024
(1)
Introduction. This rule provides information about the taxability
of and surcharge for select advanced computing businesses as described in
RCW
82.04.299.
(2)
Examples. This rule includes
examples that identify a number of facts and then state a conclusion. These
examples should only be used as a general guide. The tax results of other
situations must be determined after a review of all the facts and
circumstances.
(3)
Definitions. The following definitions apply throughout this rule:
(a)
"Advanced computing" means
designing or developing computer software or computer hardware, whether
directly or contracting with another person, including:
(i) Modifications to computer software or
computer hardware;
(ii) Cloud
computing services; or
(iii)
Operating as a marketplace facilitator as defined by
RCW
82.08.0531, an online search engine, or an
online social networking platform.
(b)
"Advanced computing
business" means a business that derives income, including income from
affiliates, from engaging in advanced computing.
(c)
"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.
(d)
"Affiliated group" means a group of two or more persons that are
affiliated with each other.
(e)
"Cloud computing services" means on-demand delivery of computing
resources, such as networks, servers, storage, applications, and services, over
the internet.
(f)
"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.
(g)
"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 had
worldwide gross revenue of more than $25,000,000,000 during the immediately
preceding calendar year. A select advanced computing business does not include
any of the following:
(i) A person 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);
(ii) A person 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;
or
(iii) A person primarily engaged
in business as a "financial institution" as defined in
RCW
82.04.29004, as that section existed on
January 1, 2020.
For purposes of (g) of this subsection, "primarily" is
determined based on the gross income of the business, as defined in
RCW
82.04.080.
(h)
"Taxable income of the
business" means the gross income of the business, as defined in
RCW
82.04.080, to which the tax rate in
RCW
82.04.290(2) is applied to
determine the business's tax liability under that B&O tax classification.
In other words, it is the business's income taxable under the service and other
activities B&O tax classification.
(i)
"Worldwide gross revenue"
means the annual sum of all sources of revenues, worldwide, prior to any
subtractions, for all members of an affiliated group.
(4)
Select advanced computing
businesses - Taxability.
(a)
Service and other activities B&O tax. A select advanced
computing business is subject to the service and other activities B&O tax
rate of 1.5 percent as required in
RCW
82.04.290(2)(a)(ii).
(b)
Workforce education investment
surcharge. Beginning with business activities occurring on or after
April 1, 2020, a workforce education investment surcharge (surcharge) is
imposed on select advanced computing businesses. This surcharge is in addition
to the B&O taxes described in (a) of this subsection, plus any additional
taxes that are due and payable to the department.
(i) Surcharge amount. For each select
advanced computing business, the surcharge is equal to the taxable income of
the business, multiplied by a rate of 1.22 percent. The combined annual
surcharge paid by all members of an affiliated group may not exceed
$9,000,000.
(ii) Surcharge
reporting. A select advanced computing business must report and pay the
surcharge to the department on a quarterly basis, regardless of the tax
reporting frequencies of the members in the select advanced computing business
under RCW
82.32.045. The return and amount payable are
due by the last day of the month immediately following the end of the quarter.
This reporting requirement continues even if the combined annual surcharge paid
by all members of an affiliated group reaches the $9,000,000 annual maximum
amount described in (b)(i) of this subsection.
(iii) Surcharge payment agreement. Members of
an affiliated group of select advanced computing businesses may enter into an
agreement with the department for facilitating the payment of the surcharge for
all members of the group.
(iv)
Disclosure obligations. 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.
(v)
Penalties. If the department establishes by clear, cogent, and convincing
evidence, that one or more members of an affiliated group, with the intent to
evade the surcharge, failed to fully comply with the department's disclosure
request, as described in (b)(iv) of this subsection, that person, or those
persons collectively, will be assessed 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 comply. This
penalty is in lieu of, and not in addition to, the evasion penalty under
RCW
82.32.090(7). However,
additional penalties may still apply including, but not limited to, the penalty
for late payment of tax due on a return. See
RCW
82.32.090(1).
(vi) Hospital and provider clinic and
affiliated organizations exemption. The surcharge described in (b) of this
subsection does not apply to:
(A) A 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
(B) 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. For purposes of
(b)(vi)(B) of this subsection, "health care services" means services offered by
health care providers relating to the prevention, cure, or treatment of
illness, injury, or disease, and "primary care" means wellness and prevention
services and the diagnosis and treatment of health conditions.
The exemptions under (b)(vi)(A) and (B) of this subsection do
not apply to amounts received by any member of an affiliated group other than
the businesses described in (b)(vi)(A) and (B) of this subsection.
(c)
Example 1. Entity X, Entity Y, and Entity Z, an affiliated group,
cumulatively had worldwide gross revenue of over $25,000,000,000 in 2021.
Entity X and Entity Y are engaged in advanced computing, and Entity Z is
engaged in real estate and leases commercial property to Entity X and Entity Y.
All three entities are registered with the department and file and pay taxes on
a monthly basis. For the first quarter of 2022, the entities reported the
following amounts as taxable income of the business, respectively: Entity X:
$800,000; Entity Y: $100,000; and Entity Z: $1,200,000.
The first step is to determine whether the taxable income of
the business (the amount subject to tax under the service and other activities
B&O tax classification) for each entity is subject to the 1.22 percent
surcharge. Because Entities X, Y, and Z are all members of an affiliated group
that had more than $25,000,000,000 of worldwide gross revenue during the
preceding calendar year (2021 in this example), and Entity X and Entity Y are
engaged in the business of advanced computing, all three entities are
considered a "select advanced computing business." Therefore, the taxable
income of the business for each entity is subject to the 1.22 percent surcharge
as follows:
Entity X: $800,000 * 1.22%=$9,760
Entity Y: $100,000 * 1.22%=$1,220
Entity Z: $1,200,000 * 1.22%=$14,640
The total surcharge owed by this affiliated group of select
advanced computing businesses for the first quarter of 2022 is $25,620. This
amount is due no later than April 30, 2022, and each entity must report and pay
its respective amount to the department.
The next step is to determine the service and other activities
B&O tax rate in
RCW
82.04.290(2) to apply to the
taxable income reported by each entity. Because the three entities are subject
to the 1.22 percent surcharge, the taxable income reported under
RCW
82.04.290(2) by each entity
will be subject to the B&O tax rate of 1.5 percent as required in
RCW
82.04.290(2)(a)(ii):
Entity X: $800,000 (*) 1.5% (=) $12,000
Entity Y: $100,000 (*) 1.5% (=) $1,500
Entity Z: $1,200,000 (*) 1.5% (=) $18,000
Each entity will continue to file and pay any taxes due on a
monthly basis.
(d)
Example 2. Using the same facts as Example 1, beginning July 1,
2022, if Entity Z was operating a qualifying hospital or provider clinic, as
described in (b)(vi)(A) and (B) of this subsection, it would be exempt from the
surcharge. However, Entity X and Entity Y would still be subject to the
surcharge because neither is a business described in (b)(vi)(A) or (B) of this
subsection.