wa-law.org > bill > 2025-26 > SB 5949 > Substitute Bill
The legislature finds that unintended tax loopholes adversely impact the state budget and reduce amounts available to fund schools and other essential services.
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 business and occupation tax is a tax on the gross receipts of most businesses in the state. Specific deductions and exemptions may apply. The tax generally applies at each point of sale in the process of providing a good or service and on sales between affiliated businesses.
In 2024, 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.
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 for the clarification to the exemption in this act to have no impact on income received by an insurer for the granting of annuity, in accordance with RCW 48.14.020(1)(a), which states that such income is not a premium.
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.
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. 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.
1.
This chapter does not apply to gross premiums and prepayments received by a person upon which the same person paid insurance premium taxes to the state pursuant to chapter 48.14, 48.15, or 48.201 RCW.
This chapter does not apply to gross premiums and prepayments received by a person that is exempt from premium taxes under RCW 48.14.0201(6).
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 their receipt of premiums .
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 (4), the definitions in RCW 48.201.020 apply.
For the purposes of this section:
"Person" includes a surplus line insurance broker who pays premium taxes pursuant to chapter 48.15 RCW.
"Premium" has the same meaning as in RCW 48.18.170.
Section 2 of this act applies both prospectively and retroactively to October 2, 2019.
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.