Chirag Shah . Respondent' s Brief,:froin Wells Fargo …...F3 11/ 05/ 20.10 Excerpt from Chirag Shah...

Casfuhere Valley Bank v. Departrnent of Revenue ( DOR)CASE NO. 42514- 9=11

APPELLANT CASHMERE VALLEY BANK' SAPPENDICES TO REPLY BRIEF

APP. DECRIPTION CLERK' S PAPERSPAGES

A 01/ 25/ 2008 Report on one of Cashmere Valley Bank' s 164- 165

investments, Washington Mutual Series WAMM52004- RA4

utilized in DOR audit'( shows no foreclosures)

F3 11/ 05/ 20.10 Excerpt from Chirag Shah .Deposition re mortgage 619- 622

pass- through certificates, CMOs and REMICs

C Excerpt from 20/ 1 Tar Preference Performance Review's, n/ a

Report / 2- 2 ( 2012); pages 1, 11, 89- 100

D Excerpt from Chapter 6, maws of 2012 n/ a

E RCW 82. 04.4292 and Legislative History 1970- 2012 n/ a

F Excerpt from .12/ 28/ 2010 Department of Revenue, n/ a

Respondent' s Brief,:froin Wells Fargo v. Dep' r ofRevenue,Case No. 40923-2- I1

ins" 40,0

0

CASO46 0002 nt255y'6410 2012- 06-27

7,trZata, S,' 4., 0. ' V 61 0 .',... ...0 0 . t .- IP '." 1...", rs :""..0.•,:, in

pm. r ,. VI-i-'4,tt.,-•4;',--`,' kIN''. .', 44,7a,..+.''':..,; 4: r+' r, : ,, EN -,, _. 1,10

Z.::::-- g.. P:c) C+,1 CsiX' 1.t0- ;', iCi..1.,W+Vilii.1. 77t;, . t•O. ,. CD ,... n., $.40- fi,

io..,..,,,, A2.-...1"-f4?cn

w,.....,:‘,,,,,.-p.3;,. •

P,' :',.. 4'."`.....:Wk.b, c,4,'"t„-.•

147.,,,W.V;',,'t11:-''•'.-', •-.' io:.11: 9";',..-;71.-1,1:: .

i•4.01.eig-X4' o'

1.7.r.,.."4.1

56114- '."

4.,-,4•.:-:-..,.,:-.,:i.,,

k,tr•V--x• P''''', 4,''• 4-4,,,...,,,•, 4,v,••.

404:4,,,,.,',' f4e , i41,;:is '+ r,..-7P,,,,,;;;;'11?:

4"-°-s-+ '*., q.4.'-',4..,,r'..57.+', 11.,M+.7,,,.4i,. 4,•.,

7‘' Ski'r.ja,,,,,,,,n,•, '

7;':,:.*',

7•,.z'...''' 2';• ii,g.:,,i7:,..4-2:-. .,: l..., 4,,-; 74....• •, is,:..'+71,l+.+4-e.:14':'

t1' i-7,;:.

r.„.in:4,":1p.,-:....4.i,: t:,...,_,,r.:;;...;,„ ,:-.:.

r.m..1:::,y...,44.,::,• Val',...'" ' •,-..- ViV•.,:::!:;.A".'''

P.I‘Ski24,,,,-'•-r:',••••t,•= thia•-•!:;4, ' 1‘; p,-(i'•,,,,,,...,,•.1.,,, ki :

N ...-...„ 7 74,,* 1:•Y$7

A.,' da+,4.,'7,-

pt+:144,...,b4,,, 4, pli4,0,:;,,,,,,

i1:01i•fl:,`,i.,PA:Vi.t.,.,r

e4-70,-1.,;',4:, .

04 .

t.,.. 1.r74fli47.:- -

4,, k•li,177' 7+,.`" t

0.44".'; 47"'r

7''.-

ilt,,y?.?k,',,,*,. ' S1

1,,-44,..,',;2',: 7„

i.a.,..,.. 10,..n.,.:..-:•,' g . 1 -:10

ilecz-vect.:4 0

1'.. 4., .78 .... 2:

0 ::-E.- 13,,,:i5z, .. . tV,O,P.4+;‘,„•,--,.,:7,- t.) ,, R ..„, cc a.

p; : 0. .s =1 „ I?, ..-- r.,z. ......: '12 A,.-13 •=- 5

4,_,':'.a..":5, iii• firP;..'...ha.5., ..... 0 1 , rz g ....7..6-:-..,-..E,.•••:tra..., V.:: ....:A,Ii ..,' 400'...4:43) v4., • ,

0 c -t-- '-:.

s -..6.. 0 , 0

2'...c. .-"....m , gie-;-,414;‘,;,;1— •-..- 421. 4'..,01-. g . r: 3 : g. g. ze ,.;,, z., ,, ,

d.'':..i.,.',- g••='.3,:.'-:7:-. '...... ,,'

kVv*,x_:.,eS3.:-q).......'.

i,,

1:

5:-;-

r..

g5.As.at,

1.s:,.,'...I'„"=.

fa0i0i"1-_,..,,p,

1,-'.'-.;-,4,

0

0,, ",.-;..,.'

T.._2°.x. , ..

p.

g5cg..

a° ''.''

c

r,'.).,,.'.•':.1.&1ac1},. '..--.::.3.

2.a.--''-..,,1-

G.a

2C.,.,.•.'...'...

0

F„c''., ,.(•

1,"

6 -

Ec9Ii--:..•;.-....-,-2,

g

6„

c..',:.,

z1ct•.-,',,

0-000000164

CJJ z.,7-1.... C Ftl c:, ..:,'

0

sfs

m Ito. m

t,

is 24,4 • ''e4

i

yobA'

s

t .. q=tyt.4,.....„-,.,,-,....... }

r ,

r„r aas! i L.sa3sxN1 ' A i '. 14',.1'1'',4*.

e. r q,

e

t

v1,-,:-.-...;.,,

em jai. Vtt. IF ID .. Gj atDI .` '

i N iy,

i. Z n -. 13pfr

cm

m 3 n

yS ' Ati m h

Q m O" yi 2 .0. G

v

o Jm 2 '

q N mp T'W '

r40 t.-d . m -` C C Z : cf. C , C.: a ' a o .

y7 9,. C22 O =-- ZniUee a .' 3 , C_ o_ •¢ I "_

0-000000165

r

ti n

1

R f +

Byers& Anderson CourtRepoiteis/.VidebNideoconferencingSeaitle/ racorna, Washington

Page 102 I . 'f

1 Q Okay. I 'm with you then. i

2 There' s also something called a pass- through? k

3 A Correct. I

4 . Q And a pass- through, as I understand it, would be a pool 1

5 of mortgages where investors would invest in that -- . E6 they would essentially be beneficial owners of that E

7 trust of a. pool of mortgages? s

8 A Correct.

9 Q But in that case, that pool of mortgages is not -- the

10 cash flow is not being collected and then redistributed c11 in any way; it' s being collected and paid out F

12 proportionately to your ownership interest?

13 A Correct. Pro rata.

14 Q Pro rata. And then what you would do when you would

15 create a CMO, is you ' would either take mortgages and

16 - pool them or purchase a pass- through mortgage- backed '

17 security that' s already been pooled and collateralized

18 or pooled and securitized and use that as thef

19 collateral for the CMO?

20 A Yes. So the pools would already be -- would alreadys

4G

21` be in existence, and we' d take those pools, and thenR

22 that' s -- on the agency side, that' s when we would

23 create the CMO. ` r

24 Q Now, if you' re creating the CMO for a private label, I

25 when you say you take the mortgage- backed -- or take f

chirag shah'November 5, 2010

Electronically signed by Barbara Hayden( 301- 34S-5524.6083) 04d5ffb1- 3405-4d2e-Bete-b825£975be1a

I

0- 000000619

Byers& Anderson Court Reporters/ VideoNideoconferencingF

SeatilefTacoma, Washington

Page 103

1 the pass- through mortgage- backed 'security, does that

2 mean you purchase it; you become the owner of it?

3 A On the nonagency side --

4 Q On the nonagency.

5 ' A -= it works out differently where you' re starting out1

6 with individual loans, and even to create that

F7 pass- through, from day one it' s a CMO because it' s

8 not -- you don' t have a pro rata distribution because

9 there is a • certain way the prospectus writes how the 110 subs, subordinate bonds, receive principal, and it 's

11 actually locked out in the beginning..

12 Q So with the private labels, it' s normally -- the

Lf 13 underlying collateral for the CMO is normally going to

14 be mortgage, you know --k

15 A Individual mortgages_ F

16 Q So it' s sort of a direct' link to the mortgages instead

17 of with the government agency issues it' s generally a t

18 link to a pass- through mortgage- backed security which

19 has a group of mortgages? 1.

20 A Right. So it' s all the underlying borrowers comesI

21 into -- well, at the end of the day, when you pay intot

22 the CMO, it goes from the underlying borrowers, and 1

f23 the trustee will determine how to syphon it to the t:

f

24 investors.

25 Q Do you happen to know in the government- sponsored

Chirng ShahNovember 5, 2010

E edronica8y signed by Barbara Hayden( 301- 345-524- 6083) 04d511b1- 3405-4d2e-9efe-b825e975be1a

0- 000000620

Byers& Anderson Court Reportersideo ideoconferencingSeatttefTacoina, Washington

e

Page 104 f

1 entity CMO issues if the direct underlying collateral

2 is a pass- through mortgage -- MBS -- and I assume there ,

3 would be more than one; you would probably have several

4 of them?

5 A Several pools.

6 Q Okay. Do you happen to know in that circumstance who

7 owns the loans? •

8 A Who owns the loans in. . .?

9 Q Yeah. Are the loans owned by the lenders, or are the.

10 loans owned by the pass- through MBS trust, or are the t

11 • loans owned by the CMO trust, or -- ti

12 A Right. f

5 13 ' Q -- somebody else?

14 A So the investor has a right to the principal andf

15 interest' payments that come off from it. And also F

16 when you -- when you do these CMO structures, you' re

r

17 actually selling the bonds off to your balance sheet

18 so it' s not on Banc of America' s balance sheet 'r

19 anymore. i

20 I don' t know what officially is said as to like

21 who owns, but I know you as an investor have the right Fi

22 to those principal and interest cash flows that comeis

23 out. s

24 Q So would the -- would the ownership of the loans be G

25 something that would be specified in the prospectus, i

1

Chirag ShahNovember 5, 2010

eacbanicaDy signed by Barbara Hayden( 301- 345- 524-6083) 0445ftb134O5-412e-9efe-b8256975be1 a

i

0- 000000621

fki: Byers& Anderson Court ReportersNideoNideoconferencingSeattle/ Tacoma, Washington

Page 105

1 prospectus supplement, trust document, some document

2 that' s been created?

3 A There should be some governing document that explains

4 it. 15 Q All right. So then let' s go back to our Exhibit 18.

f6 We' ve got a list of -- the lead- in before- the bullet t

7 points is "The steps include: " so• I' m assuming thate

8 this bullet point of six• things is not exclusive. ruv

9 So let me ask you,- first of all, other than the six

10 steps listed in this e- mail, are there other steps

11 involved? Are we missing any steps? 1

12 A This seems to summarize it pretty well. If I can

13 think of anything as it comes forward, I' ll definitely •

14 say. f

15 Q But as you sit here now, you don' t anticipate y16 testifying at trial of a seventh or some other step

17 that we don' t have listed here?

18 A The current -- currently the way that I' see it, I do

19 not.

20 Q So let' s go through these kind of quickly then.

21 So the first step is the mortgage lender extends a

22 loan. to a homeowner, creates a mortgage, correct?

23 A Correct. . 1

24 Q And then the lender sells that loan?

25 A The .-- so the lender can do, you know, one of two.

Chirfig ShahNovember 5, 2010

Efestroniptly signed by Barbara Hayden( 301- 345-524-6083) 04d f1b1- 3405 9cfa-bB256975be1 a

I

0- 000000622

State of Washington

Joint Legislative Audit & Review Committee (JLARC)

MV:R,Y4v-p-:,,,,ow.,,,:;::-w;,i14t,,, i ,---, 1. :0:4,-*, 0„,:, -.,:-;), ,,..!

11,:_.„...,...„„,;, t-;,,c,,,:„,..:,_;,,,, fi 1„,...t,4,„,„,, ,..„,_ ,.

t.,,z,,-,...-34

f:::: :.,1:-#::;'....ft:4:,".,,V:`,,,,.i',4i,,,,k,,i, 1

2011 Tax Preference

Performance Reviews

Proposed Final Report

January 2012

Upon request, this document is available in

alternative formats for persons with disabilities.

1

Joint Legislative Audit and Review Committee

1300 Quince St SE

PO Box 40910

Olympia, WA 98504

360) 786-5171

360) 786-5180 Fax

www.jlarc.leg.wa.gov

Committee Members Audit Authority

SenatorsThe Joint Legislative Audit and Review Committee MARC) works

Nick Harperto make state government operations more efficient and

effective. The Committee is comprised of an equal number ofJeanne Kohl-Welles

House members and Senators, Democrats and Republicans.Sharon Nelson JLARC' s non-partisan staff auditors, under the direction of theJanda Holmquist Newbry Legislative Auditor, conduct performance audits, program

Linda Evans Parlette, Secretary evaluations, sunset reviews, and other analyses assigned by the

Cheryl Pflug Legislature and the Committee.

Craig Pridemore, Chair The statutory authority for JLARC, established in Chapter 44.28Joseph Zarelli RCW, requires the Legislative Auditor to ensure that JLARC

Representatives studies are conducted in accordance with Generally Accepted

Gary Alexander, Vice ChairGovernment Auditing Standards, as applicable to the scope of

the audit. This study was conducted in accordance with thoseCathy Dahiquist applicable standards. Those standards require auditors to planKathy Haigh, Assistant Secretary and perform audits to obtain sufficient, appropriate evidence to

Troy Kelley provide a reasonable basis for findings and conclusions based on

Mark Miloscia the audit objectives. The evidence obtained for this JLARC report

Ed orcutt provides a reasonable basis for the enclosed findings and

Derek Stanford conclusions, and any exceptions to the application of audit

Hans Zeiger standards have been explicitly disclosed in the body of thisreport.

Legislative Auditor

Keenan Konopaski

TABLE OF CONTENTS

Report Summary and Citizen Commission Comments 1

Aircraft Fuel Tax, Export and Commercial Use( Aircraft Fuel Tax) 23

BoatSales to Nonresidents/ Foreign Residents( Sales Tax) 35

Church Camps( Property Tax) 49

Display Items for Trade Shows( Use Tax) 57

Extracted Fuel( Use Tax) 63

Hog Fuel to Produce Energy( Sales& Use Tax) 75

Interest from State and Municipal Obligations( Business& Occupation Tax) 83

Interest on Real Estate Loans( Business& Occupation Tax) 89

Interstate Bridges( Property and Other Taxes) 101

Investment of Businesses in Related Entities( Business& Occupation Tax) 109

Laundry Services for Nonprofit Health Care Facilities( Sales Tax) 117

Limited Income Property Tax Deferral (Property Tax) 123

Meat Processors( Business&Occupation Tax) 137

Municipal Sewer Charges( Business& Occupation Tax) 149

Nonprofit Blood and Tissue Banks( Property Tax) 155

Nonprofit Day Care Centers( Property Tax) 163

Nonprofit Sheltered Workshops( Property Tax) 171

Open Space Additional Tax( Property Tax) 179

Real Estate Excise Tax Exemptions( Real Estate Excise Tax) 187

Renewable Energy Machinery( Sales& Use Tax) 201

Repaired Goods Delivered Out-of-State( Sales Tax) 215

Sales of Goods to Certain Nonresidents for Use Outside the State( Sales Tax) 223

Sales or Use Tax Paid in Another State( Use Tax) 237

Shared Real Estate Commissions( Business& Occupation Tax) 245

State-Chartered Credit Unions( Business& Occupation Tax) 255

Appendix 1 - Scope and Objectives A1- 1

Appendix 2- Agency Responses A2- 1

Appendix 3- Current Law A3- 1

2011 Tax REPORT SUMMARYPreference

Performance What Is a Tax Preference?Reviews Tax preferences are exemptions, exclusions, or deductions from

Proposed Final Report the base of a state tax; a credit against a state tax; a deferral of a

state tax; or a preferential state tax rate. Washington has nearly

January 2012 590 tax preferences.

Why a JLARC Review of Tax Preferences?aril ,,

11} i o Legislature Creates a Process to Review Tax

Preferences

iit' Iii 1111 1 C I) II) i 1 In 2006,.the Legislature expressly stated that periodic reviews oftax preferences are needed to determine if their continued

STATE OF WASHINGTON existence or modification serves the public interest. TheJOINT LEGISLATIVE AUDIT AND Legislature enacted Engrossed House Bill 1069 to provide for an

REVIEW COMMITTEEorderly process for the review of tax preferences. The legislationassigns specific roles in the process to two different entities. The

STUDY TEAM Legislature assigns the job of scheduling tax preferences, holdingMary Welsh public hearings, and commenting on the reviews to the CitizenDana Lynn

Peter Heineccius Commission for Performance Measurement of Preferences.

John Bowden The Legislature assigns responsibility for conducting the reviewsto the Joint Legislative Audit and Review Committee(.JLARC).

PROJECT SUPERVISOR

John Woolley Citizen Commission Sets the Schedule

The Legislature directed the Citizen Commission for Performance

LEGISLATIVE AUDITOR Measurement of Tax Preferences to develop a schedule toKeenan Konopaski accomplish a review of tax preferences at least once every ten

years. The Commission is directed to omit certain tax preferences

Copies of Final Reports and Digests are from the schedule, such as those required by constitutional law.available on the JLARC website at:

www.Jiarc. leg:wa.govIn October 2010, the Commission adopted its fifth ten- year

or contactschedule for the tax preference reviews. This volume includes

Joint Legislative Audit& Reviewreviews of a total of 25 tax preferences under the business and

Committee occupation tax, sales tax, use tax, property tax, aircraft fuel tax,1300 Quince St SE

and the real estate excise tax.Olympia, WA 98504-0910

360) 786- 5171

360) 786- 5180 FAX

JLARC Proposed Final Report: 2011 Tax Preference Performance Reviews 1

ww

a)

0 , t- : v C Q. o

C 4/) ..o k tO a ^ w

e. e,1'401 0,,,, to ciE td N L C CO O vM 0 to:.

w C a 0 w w O . T n. O

w a wVI ' . C. _*' C. P. C ,. 0 _.• ti >. 7 .° Z toO:• a. ', • r kA t3 „ R1 7' :L .-, -> a. p

t

F C ,.. ' L7. e O C O p O

C O 0. w t.t0 O, C; ti IQ t, aA w O co O

xs-, C".'

ta. h u . 5-0 tow a a O

O ' O;. "cam o u v . o >

V '°_ y COca'•

M w 71.' • bA

il .0 "

w^.

v, O O

gaa)

C E O cp" a. es y r, •

44 to .0 H y, a t? .ry 13C 0 C3 w O i >. O•

Na - U O W V to e

y uG

CVc o- C 0 C) t4 .. 0 ° a,4-• w v i 0 aCa J z u

o E d a '

w

w U . 1: 3 O '>. 0 C

p j ^a) wv yw

3I "0 v >. a nf••••

i o ouS

o d

w = v w a,U i ..

Nw 0.0 ta Y a L . b t,.- O . 0 n .- C-

asco cc)

44 dA CU

CZK o CS b.-

w`

ai6Q l

aco c o c o o

CV CO C

yC',„ w 0

O G) CCO

a' tt

X_ ' vn,, L.

w x cu O .

0E ,1.

m O •

a. F O P o, 4.1 4, ' u, ca eL o

AlmUa h,' V. aer. t to w L > CL ' . O!

ate.+ . '.f7

n y Ct

C y O t X a. , x • H CXL -

t .

8 •- OU W . 1, 4 0 i ia) .

3 a) cs .= tin ' a4/ 7 A O bQ C ' l7 a+

y H a. .' yy y .-i <u ICO. a. a, OD O C a.

y) O to

a -

E $• co* y t6i a) w Li C Cf

y y h cw

w tr3 L ..

cn ca •y oL to rvy. es 5 a) a C vO . bU ' O: Nr, A eed

ea C COU to c w O

0a +..• : o ._, w w C '

V W . ' , ai- C:.

x —• w C co 4 w '" O a:a

L

s L

xQ' U U o o °'. u a+ to C t, > iQ' C C' C 4- t•' O

O t0 w Vi Lv w v

IV ( 0 =1.

ccw

a w0 t=

o) 0 cE . v a w °_) OA

CC V_ `V 91 •.u o N' VO.) - c

O ,. to t.. *^ .- ' O > a bDV 0. to O . d

v000, 0 o O C c C

O a. 2 t".. - 1:' m CU y vi

CuO - u a: n o,

at'i O w is in w 0 C 0 W

rfi, . c 0 -c C O' 9 R 0 ' J C R c E w O6.

O i. N Otog.n cr

tr = c, o ti c .bn

U c,' o to d d w aA ° ed 3 c ti v

N C,'- .c 0 iA c '' t0'

gry' + i7 0.-p v I- a) .. o tri ...•

A• H N Eto

U w Z , coU L. Vl c w v, O1 F

w ti0CR .- .

a. c u ''- w ,tz) .- . 0 _ a• w ! 6J L. au"_o L i.t -0 i ca : a,

s

0# O

C T3 f7aV`

wO

L^ C Ov •a

Vl a) 0 0 t ` 5 y '„ a

a a HOB a t- c s C - o: w aw n a,

tp era' w •:. o f t •QS' a) u •a >. a C a a Lf +- ° n CH a. a•W - p `..`` H a. L) O . 0 a3 C

ae O

C.. O L i w C . d0 _,

7' Oy mo w. v

C .; y .0 c cGi

to o ' a

t6; w O 0 to .

y. r.. R- OL y X

x C Cw 0.,, C oq CO

w ' u, O o cm

o a c o 3 o 0 , wto w v o Oct ox C C m a C

y4, O H V w (

to + f

Si, f AM, . CO • y. i. t''''v t0 o ` in w ->, C v G o. bA.

tipq j p4 , O

O

g' 8J Z, 2 v,. ca . to O Q] 9 '7 > _ a C , 2 - C ' n O w - 0 C

z ' u 3 u o - U i , s E .0 O w F C 4, a c L c .a

CD ( C - j O Cwy d yU O

u0y s T7

au!), c, ' 0 toI

i R= w y t ecl wxy C

a 4. 60 ' fl ai ' pA "C y u 5

M'

a w L

am+

2 4 '' 1 •' d > 0 w`` f5 2 Y a'. C

t s+z H a C O a cC > 7. y C O y by' y 0 tti `

co, • -

G ii•a

c ' w aJ U PtUt' 0 to ' C w U .0 . 0 g? ca '' ry >. .' 9-- -

2s E7G: 05 S w 70 L A t/7 O

vUiOx c" O C 0 = y [

C C p w . O bB O C, go O O w

C O to ) E'+ O . 0 O Yom, t., ++ ' C •.

nr:,€,

r

ate, to - 0 - L. O • w tJ ..- u Ccs

O p Es 0- 0

y w . g C `- C y

G p O

y i ''t, > u 03)i^CC

oA. - - v O Oa`) C

a[S b O ' v4 0

4UCd

8572 Ca :

w a > o O . cC U LuL

wd o .

r a _ • T4. . G. L 0. W O

INTEREST ON REAL ESTATE LOANS

BUSINESS & OCCUPATION TAX)z

y , 5n t a v t

l a{f(, y', ajvs r t, v

a'r&, ^

zt-`' ' vE. .`.. ..`.. o''- a^ tr̀, ,1. 5'-•: :.

Wh` Estimated

JLARCW

a { ttat tut @€'+ s ! `'

X , ,„s w

3aPUbtic.Poticy,Ob ective , * Beneficiary ReccommendationPreferenceiDoesr n w,-35 SdVln cr m

enaop a8:0' .,., a .' t a :. ": ikh.. x.,: x.°rc`,: w,rcr i,.._'s ri: ae^:°-- 0.- s s,-.,; L

Provides a B& O tax The Legislature did not specifically state the $ 172. 6 Review and clarify:deduction to banks public policy objective of the preference. million in Because it is unclear

and other financial Documents from the period of enactment2011- 13 whether the original

businesses for interest Biennium public policysuggest the original.purpose was toderived from

encourage Washingtonians to buy homesobjective applies,

investments or loansby making loans more available and less given changes in the

primarily secured by expensive. lending industry andfirst mortgages or the rise in the

trust deeds on non- secondary mortgage

transient residential market.

properties in

Washington.


Interest on Real Estate Loans( Business& Occupation Tax)

90 JLARC Proposed Final Report: 2011 Tax Preference Performance-Reviews

INTEREST ON REAL ESTATE LOANS

BUSINESS & OCCUPATION TAX)v` y

fit' ( ci

344'is

Current Law

This tax preference provides banks and other financial businesses a business and occupation (B& O)tax deduction for interest derived from investments or loans primarily secured by first mortgages ortrust deeds on nontransient residential properties in Washington. A deduction is also allowed to

the original lender( or successor) for amounts received from servicing loans that have been sold onthe secondary market, as long as the servicing fee is based on a percentage of interest paid by theborrower.

Financial businesses include banking, lending, and security businesses. A first mortgage is the firstloan secured by a property, often used to purchase the property. Therefore, home equity loans donot qualify for the exemption if they are second in line to be paid upon sale of a home. Non-transient residential property is a permanent residence and not a hotel or motel.

The following exhibit provides two examples ofthe operation of this preference. The first is asimple example of a deduction where a home loan is held by onebank. The second is a morecomplex example where the bank sells the home loan on the secondary market to investors. Exhibit28, below, illustrates these transactions.

Exhibit 28- Mortgage.Loan Transactions

Borrowerrmakesprrnc pal> Bank can deductmterest.,paym ntst©ttbanK interest payments

from homeowner

Pnnci oal Bank can deductinterest retained toservice loan

1:4101

4Interest

i z " 11E Principal F

a.

Ban ellss the to , 5 V

p.

k 4

kfrtihitng a¢po tign.osrvasit , iT v - 41 ?, l t , r

Interestt Yserrvice loarr,:v0n...d 4 Ott' 'xSf4d iY":

Source: JLARC analysis of tax law.



Deductible interest includes amounts received by a financial business to service certain loans after itsells the loan or loan security on the secondary market.

Financial businesses can only deduct amounts paid to service loans if those amounts are:Determined by a percent of the interest;Received only if the borrower makes payments; andBased on a loan originated by the financial businesses claiming the deduction.

A deduction is also allowed for fees charged to borrowers( including points and loan originationfees) that are recognized over the life of the loan as an adjustment to the loan payment.

Financial businesses cannot deduct:

Fees not recognized over the life of the loan, such as fees for services( such as documentpreparation fees, finder.fees, brokerage fees, title examination fees, fees for credit checks,

notary fees, and loan application fees);Fees received in consideration for an agreement to make funds available for a specific period

of time and terms ( commonly referred to as commitment fees);Gains of the sale ofvaluable rights; and

Gains on the sale of loans:

See page A3- 4 in Appendix 3 for the current statute, RCW 82.04.4292.

Legal HistoryNational banks are governed by federal banking law. State banks are governed by the state bankingauthority. In Washington,' the banking authority is the Department of Financial Institutions( DFI).Pre-

1969 The Legislature attempted unsuccessfully to tax the income of national banks in 1929, 1933,and 1935. In all three-instances, the courts found the tax to be in violation of the U.S.Constitution. 6. 7. s The Legislature consequently decided it would not tax state banks. As aresult, Washington exempted from B& O taxation all income from bank loans of any kind.

1969 Congress reversed long-standing prohibitions and allowed states to tax national banks, butnot federally chartered credit unions.

1970 The state Legislature repealed the B& O exemption for national and state banks and certainother financial institutions.

In the same bill, the Legislature provided four specific deductions to maintain the tax statusof certain financial income:

National Bank ofCommerce v. King County, 153 Wn. 351, 1929.Aberdeen Saving& Loan v. Chase, 157 Wn. 351, June 1930.

First National Bank ofKirkland v. tienneford, No. 16135( Thurston County Super. Ct. 1936), cited in 6th BiennialReport of the Tax Commission, for the period ending September 30, 1936.

92 JIARC Proposed Final Report:.2011 Tax Preference Performance Reviews


1) For financial businesses, amounts derived from interest received on investments or

loans primarily secured by first mortgages or trust deeds on nontransient residentialproperties ( the subject of this review);

2) For financial businesses, amounts derived from interest paid on all obligations of the

state, its political subdivisions, and municipal corporations( the subject of a separate

2011 review);

3) For lending institutions owned exclusively by its borrowers or members engagedsolely in making loans for agricultural production, amounts derived as interest onloans ( review scheduled for 2020); and

4) For state- chartered credit unions, an exemption for all gross income( the subject of a

separate 2011 review).

Following enactment, the Department of Revenue( DOR) and stakeholders engaged in 30- years ofadministrative appeals and litigation on the first mortgage tax preference. The appeals centered on

two issues: 1) what qualifies as nontransient residential property( see Exhibit 29 below), and 2)what qualifies as deductible interest (see Exhibit 30 on the following page). For the most part,

subsequent rulings expanded the scope of the deduction.

Exhibit 29—Rulings on What as Non-Transient Residential Propertyr¢ - 4" t>'' `... 7

Aar w.t-'e m ti ifies ' `

1974 • Single family residences( 1 to 4 units) Hotels

Apartments Motels

Construction of residential property, including • Transient apartments( less than 30 day

trailer park sites stay)

Mixed residential and business property if the • Churches

business use is 20% or less of the value

Permanent care nursing& convalescent homes

reversed in 2000 court ruling)

2000 Nursing homes and convalescent carehomes( court reversed 1974 DOR ruling)

9

Source: JLARC Analysis of statute, DOR rulings, and court rulings. All decisions are Department of Revenue rulings,unless noted as a court ruling.

9 Lacey Nursing Center v. The Department of Revenue, 103 Wn. App. 169( 2000).



Exhibit 30—Rulings on What Qualifies as Deductible Interest1 y rdq r

F'^'"F, ' ' ., -` Y, ` x +` '- gyp,'? {. -^ ., " h : r ,, s s.^. rt ' yv w+k

7 Quallfies, ,, p OZ . . tiDoes}not1Qualify i1971 interest on loans by speculative builders and

land developers

1974 Discount points( codified in 2010)

1976 Late charges,and pre- payment penalties

1981 Security interest in mobile homes( court 1984 Fees for services provided by the lender( setup

ruling)"charges, document preparation fees, title

1986 Interest on mortgage-backed securities insurance, and recording fees)court ruling)1°( codified in 2010)

1988 Loan origination fees which represent an

interest yield adjustment( codified in 2010) 1989 Gain on sale of mortgage- backed securities

codified in 2010)

1999 Interest retained by the lender to service aloan sold on the secondary market( reversed in

2009 court ruling)

2000 Mortgage brokerage fees for serving as a2002 Advances to mortgage brokers to fund loans broker between the bank making the loan and

court ruling)'2 the buyer( codified in 2010)

2009 Interest retained by the lender to service aloan sold on the secondary market( courtreversed 1999 determination)( codified and

limited in 2010)

Source: JLARC analysis of statute, DOR rulings, and court rulings. All decisions are Department of Revenue rulings,unless noted as a court ruling.

2009 The Washington Supreme Court held in l-tomeStreet v. DOR13 that interest retained by thelender to service a loan sold on the secondary market qualifies for the deduction.

2010 The Legislature made three major changes in the law related to mortgage interest by:

1) Codifying many of the previous rulings on what qualifies as deductible interest ( SeeExhibits above);

2) Clarifying the deduction provided in the 2009 HomeStreet case applied to the specificcircumstances of that case( i. e., to situations where the taxpayer originates the loan andwhere the retained service fees are based on interest paid by the borrower); and

3) Redefining the nexus required of out- of-state financial businesses in order to be liable forWashington B& O taxes(" nexus" is the connection with a state determined by physicaland/ or economic presence).

10 Aetna Finance v. Darwin, 38 Wn. App 921 ( 1984).

Tacoma Savings el- Loan Association v. The Department of Revenue, No.277826( Pierce County Super. Ct. 1981).

2 Department of Revenue v. Security Pacific Bank, 109 Wn. App. 795( 2002).13liomeStree: v. DOR, 166 Wn.2d 444.( 2009).

94 JLARC Proposed Final Report: 2011 Tax Preference Performance Reviews


Other Relevant Background

Significant changes in the mortgage-;lending industry have taken place since enactment of the firstmortgage deduction. A number of Washington banks have closed or merged with large multi- statebanks. In addition, a secondary market for mortgage- backed securities which began building in the1980s has developed to the point where the loan originator sells most mortgages on the secondary

market.

Bank Consolidations Reduce Loans Held by Local BanksMortgages held in Washington have-declined due to bank closures and mergers with out-of-state

banks. The year 1997 signified a major decline in the amount of residential mortgage loans earninginterest in Washington. In that year, several large banks closed their Washington headquarters

including Bank of America, U.S. Bank of Washington, KeyBank, and First Interstate Bank ofWashington.

Exhibit 31 —Percent:of 1.13. Loans Paying Interest to WA BanksOne to Four Family Residential Mortgages)

1. 6%

1. 45'0

Qi c h

id, 12%c

o A

1. 0%vi

D

0 0.8% Several major banks

closed WA headquarters

0.6% in 1997

a

0.4%

0.2%

0.05'0 , 4 , , , 1 I , , , , r , T , , r r , r , , I 1 . 1 r-J , , 1 , , T , t , , 4 , ,

lob\

qg'\ \ .\ '\

1°A)

5 1°5 •\°

9R

1' 1:5 I\ 1:5 1:)0R\ ..'

C) P . "ii) 15) 6Ric' Rib oP

Year

Source: Federal Deposit Insurance Corporation( FDIC).



Mortgage-Backed SecurityMarket EmergesAt the time of enactment of the deduction in 1970, loan availability was highly dependent on

borrowers making loan payments. Borrowers would,pay interest and principal to local banks whichwould then use those funds to make loans to other borrowers. Now, loan availability is lessdependent on local repayment of loans since most loans are quickly sold on,the secondary mortgage

market. Today, 87 percent of all first mortgages on home purchases in Washington are sold on thesecondary market, and banks now use income from reselling the loan to finance new loansnationwide.

Short- term residential construction loans are also eligible for the deduction if the land is zonedresidential and the builder-commits or is required to build nontransient residential housing.

Residential construction loans do not sell on the secondary mortgage market, but are retained by theoriginating bank.

Public Policy ObjectiveWhat are the publicpolicyobjectives that provide ajustification for the taxpreference? Is there anydocumentation on the purpose or intent of the taxpreference?

The Legislature did not state the specific public policy objective of this tax preference.

Documents from the period of enactment suggest the original purpose was to encourage

Washingtonians to buy hoines by making loans more available and less expensive. A letter in 1971from the Department of Revenue to Senator Hubert Donohue, Chair or the Senate Revenue andTaxation Committee, stated that the purpose of the deduction was:

to stimulate the residential housing market by making residential loans available tohome buyers at lower cost.

While this objective was originally articulated by DOR, it was subsequently referred to as the publicpolicy objective bythe Washington State Supreme Court in two cases, Security Pacific v. DOR ( 2002)and HomeStreet v. DOR (2009). When the Legislature amended the preference in response to the

HomeStreet opinion, it did not use this opportunity to clarify the public policy objective.

What evidence exists to.show that the taxpreference has contributed to the

achievement ofany of these publicpolicy objectives?It is not clear from the quantitative data whether the deduction has contributed to the achievement

of the implied public policy objective.



JLARC analyzed historical banking, interest rate, and homeownership data, and could find noconclusive evidence that the deduction increased loan availability or decreased loan costs.inWashington. For instance, Washington housing starts, measured by new housing permits, havefluctuated considerably both before and after enactment of the preference, making it difficult toconclude whether the deduction had an effect on homeownership. See Exhibit 32, below.

Exhibit 32— Unclear if WA Housing Starts are Influenced by the DeductionWA-Hou"SingStarts as a Percent of U. S.)

4% -p

Q 2°fo a .,.

s

O

c Preference

1% _ enacted in

1970a.

0% 1 1 I 1 I T T I I- I IT I T T II I I I I I i 1 1 1 1 T 1 1 I 1 1 C I I I T I T I II T- 1 f i l l

tPb1. roC` bb ( 0CC6 Atbc&( L.( P cb{

o cbcb cP (4° 4b O 61' QP` OHO4°) \

I\ 4?) 4?) \ • 1 1°) 1°) 4o) ,

moo)

1 , poi 4? 4 5" 1°) ) ,ti4 , 10 , y0 . y0 .

LOSYear

Source: JLARC analysis of U. S. Census Bureau data, 1966-2009.

On the other hand, changes in the lending industry and the economy appear to have had asignificant impact on locally available loans and loan cost.

The Legislature created the deduction in an era when local banks held their own loans and used

payments to fund new loans in the community. Most loans are now sold on the secondary marketand do not stay in the community to generate new loans. Also, most loans in Washington are madeby out-of-state owned and operated banks, and Washington loans are not dependent on localavailability of funds.

To what extent will continuation Of the taxpreference contribute to these public

policy objectives?

There is no evidence that continuation of the tax preference will contribute to the implied public

policy objective of making residential loans available to Washington home buyers at lower cost.



If the public policy objectives are not being fulfilled, what is the feasibility ofmodifying the tax preference for adjustment of the tax-benefits?A mortgage interest deduction for banks may no longer be an effective mechanism for achieving theimplied public policy objective of increasing loan availability and decreasing loan costs inWashington. The deduction tends to benefit banks that do not sell mortgages on the secondary

market. Today, the majority of banks do sell loans on the secondary market.

If the Legislature wanted to target the borrower more directly, it could structure a tax preferencebased on taxes paid by borrowers.

Beneficiaries

Who are the entities whose state tax liabilities are directly affected by the taxpreference?

Currently, there are 111 bank and thrift institutions that make residential mortgage loans inWashington, according to banking data. An estimated 70 percent of the deduction benefits banksheadquartered out of the state and 30 percent benefits banks headquartered in Washington. See

Exhibit 33, below.

Exhibit 33—Estimated Deduction Taken for First Mortgage InterestInterest on Loans" percent Number

Location of Headquartersi xi ten

x Secured by1, Ltens § ,. ofTotal;1 , ofBanks

Out of State( estimated) 1, 842, 000,000 70% 25

Washington ( actual) 787,000,000 30% 86

Total 2, 629,000, 000 100% 111

Source: MARC Estimate based on 2009 FDIC deposits and call report data. Interest income earned by out-of-statebanks is not broken down by location of the loan. Instead, JLARC estimated this interest based on the percentage ofWashington branch deposits to all U.S. deposits for each institution.

To what extent is the:tax preference providing unintended benefits to entitiesother than those the Legislature intended?

JLARC could find no evidence of unintended beneficiaries.



Revenue and Economic Impacts

What are the past and future"tax revenue and economic impacts of the taxpreference to the taxpayer and to the government ifit is continued?

The beneficiaries of the B& O tax deduction for first mortgages saved an estimated$ 56.6 million instate taxes in Fiscal Year 2010. Beneficiary tax savings in the two years of the 2011- 2013 Bienniumare estimated to be$ 172.6 million. (See Exhibit 34.)

Exhibit 34—Beneficiary Tax Savings.,from:B& O:Tax Deduction for First MortgagesY'.,

ir rt u .

v _ .x = ,r Banks, Savings& tLoans,

z Mortgages r r3

3

Fiscal.Yearr

CredittUnions, et ,j G x= Companies,

h ,4 _„ i Total t i,

2009 39,400,000 512, 600,000 52, 100,000

2010 42,900,000 13, 700,000 56, 600,000

2011 53, 500,000 17, 100,000 70,600,000

201 x x63̀, 0,00,000„', SS,20, 100`0133

567,$ 00,000 .. . 52 9, 700;0007

x$89>50U, 00,0 `;

2011` 13 Bienniuim 130,800,000„ y 41, 800,000 S ' $ 172, 600,000

Source: JLARC analysis of FDIC cal( and tirift.reports, Federal Reserve Board Survey of Consumer Finances, DOR taxreturns, and projections ofU.S. home sales and prices provided by the Economic and Revenue Forecast Council.

If the taxpreference were to-be terminated, what would'be the negative effectson the taxpayers who currentlybenefit from the tax preferenceand t̀he extent towhich the resulting'higher taxes wouldhave an effect on employment and theeconomy?

JLAI2C cannot determine the overall impact on the economy if the preference were terminated.

Termination of the tax preference would have some negative effect on the income of financial

businesses that make mortgage loans in Washington. The B&O tax on a 15- year$ 250,000 mortgageloan at a fixed 5percent interest rate would be$ 225 in the first year. If the lender sold the loan, tax

would only apply to the portion of interest retained for servicing the loan.

The cost of lending is determined by a wide variety of factors including the Treasury bill rate.Therefore determining the impact of the exemption on the economy is not possible.

If the tax preference were to be terminated, what would be the effect on thedistribution ofliability forpayment ofstate taxes?There would be no change in the distribution of tax liability. Both instate and out-of-state bankswould pay higher B& O taxes.



Other States

Do other states have a similar tax preference and what.potential public policybenefits might be gained by incorporating a corresponding provision inWashington?

Washington is the only state to offer a statewide deduction for income specifically derived frominterest on loans secured by first mortgages or trust deeds. However, West Virginia has an identicaldeduction for municipal business and occupation taxes. Almost all other states use net income or

net worth to tax financial institutions and do not provide a deduction for interest.

Recommendation

Because it is unclear whether the original public policy objective applies, given changes in thelending industry and the rise in the secondary mortgage market, the Legislature should clarifythe public policy objective of the first mortgage interest deduction.

Legislation Required: Yes

Fiscal Impact: Depends on the legislation

100 JLARC Proposed Final Report:2011 Tax Preference Performance' Reviews

APPENDIX

D

ENGROSSED SENATE BILL 6635

State of Washington 62nd Legislature 2012 2nd Special Session

By Senators Murray and: Kline

Read first time 04/ 04/ 12. Referred to Committee on Ways & Means.

1 AN ACT Relating to improving revenue and budget sustainability by2 repealing, modifying, or revising tax preference and license fees;

3 amending RCW 82. 04. 4292, 82. 04. 4266, 82. 04. 4268, 82. 04 . 4269, 82. 04. 260,

4 82. 08. 986, 82. 08. 986, 82. 12. 986, 66. 24. 630, 82. 29A. 020, 82 . 04. 214, and

5 - 82. 04. 260; adding a new section to chapter 82. 04 RCW; creating new .

6 • sections; providing an' effective date; providing a contingent effective.7 date; providing expiration dates; and. declaring an emergency.

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

9 PART I

10 LIMITING TEE FIRST INTEREST MORTGAGE B&O DEDUCTION TO COMMUNITY BANKS

11 NEW SECTION. Sec. 101. A new section is added to chapter 82. 04

12 RCW to read as follows:

13 1) Amounts received as interest on loans originated by a person

14. located .in more than ten states, .or 'an affiliate of such' person, and

15 primarily secured by' first mortgages . or trust deeds on. nontransient16 residential properties are subject to tax under RCW 82. 04. 290 (2) ( a) .

17 2) For the purposes of this subsection, a person is located in a

18 state if:

p. 1 ESB 6635

1° a) The person or an affiliate of the person maintains a branch,2 office, .or one or more employees or representatives in the state; and3' b) Such instate presence allows borrowers or potential borrowers4 to contact the branch, office, .employee, or' representative concerning5 the acquiring, ' negotiating, renegotiating, or restructuring of,. • or

6 making payments on,' mortgages issued or to be issued by the person or7 an affiliate of the person.

8 3) For purposes of this section:

9 a) " Affiliate" '.means a person is affiliated with another person,10 - and " affiliated." has the same meaning: as. in RCW 82. 04. 645; and .

11 b) " Interest" has the same meaning as in RCW 82. 04. 4292 and also12 includes servicing fees described in RCW 82. 04.4292 (4) .

13 Sec. 102. RCW 82. 04. 4292 and 2010 1st sp. s. c 23 s 301 are each

14 amended to read as follows: .

15 1) In computing tax there may be• deducted from; the measure of•. tax16 by those engaged in banking, loan, security or other financial

17 businesses; interest received on investments or loans primarily secured18 by first mortgages or trust deeds on nontransient residential

19 properties.

20 2) Interest deductible under this section. includes the portion of

21 fees charged to borrowers, including points and loan origination fees,

22 that is recognized' over the life of •the loan as an adjustment. to yield

23 in the taxpayer' s books and records according to generally accepted

24 accounting principles. '

25 3) Subsections (1) and ( 2) of this , section notwithstanding, the

26 following is a nonexclusive list of items that are not deductible under27 this section:

28 a) Fees for specific. services such as: Document..preparation fees;

29 finder fees; brokerage fees; title examination fees; fees for credit

30 checks; notary fees; loan application -fees; interest lock- in. fees if

31' the loan is not made; servicing fees; and similar fees or amounts;

32 b) Fees received in consideration for an agreement to make funds

33 available for 'a . specific period of time at specified terms, commonly

34. referred to as commitment fees;

35 c) Any other fees, or portion -of a fee, that is not recognized

36 over the life of the loan .as an adjustment to yield in thetaxpayer' s

ESB 6635 P• 2

1 books and records according to generally accepted accounting2 principles;

3 d) Gains on _the sale of valuable'.rights such as service release4 premiums, which are amounts received when servicing. rights are sold;5 and

6 e) ' Gains on the sale of loans,' except deferred loan origination7 fees .and .points deductible under. subsection (2). of this section, are

8 not to be considered part of the proceeds of sale of the loan.9 4) Notwithstanding subsection (3) . of this section, in computing

10 tax there may be deducted from the. measure of tax by those engaged in11 banking, loan, security, , Or ' other financial businesses, amounts .

12 received for: servicing loans primarily secured by first mortgages or13 trust deeds on nontransient residential properties, including such

14 loans that secure mortgage- backed or. mortgage- related securities, but

15 only if:16 a) ( i) The ,loans were originated by the person claiming a deduction .17 under ' this subsection ( 4) and that person' either sold' the loans on the

18 secondary- market or securitized the loans and sold the securities on19 the secondary market; or

20 ii) (A) The person claiming a deduction under this subsection ( 4)

21 acquired the loans from the person that originated the loans through a

22 ' merger or acquisition of substantially all of the assets of the person

23 who originated the loans, or the person claiming. a deduction under this

24 subsection ( 4) is affiliated with the person that .originated' the loans.

25 For purposes of this subsection, '" affiliated" means ' under—common

26 . control. • "Control". .means the possession, ' directly or indirectly, of

27. ' more than. fifty percent of the power to direct or cause the direction

28 of the management and policies of a person, whether through the

29 ownership of voting shares, by, contract; or otherwise; and

30 B) ' Either the person who originated the loans or the person

31 claiming 'a deduction under this subsection ( 4) sold the loans on the

32 secondary market or securitized the ' loans and sold the securities on

33 the secondary market; and

34 b) The ' amounts received for servicing the loans are determined by

35 a percentage of- the interest paid by the borrower 'and are only received

36 if the borrower' makes interest payments.

37 5) The deductions provided in this :section do not apply .to .persons

38 subiect •to tax under section 101 of this act.

p. 3 ESB 6635

1 6) By_ June; 30._ 2015. the jointLlegislative auditLand_ review2 committee must review_ the deductions_ provided- in this_ section,_in3

accordance with RCW 43. 136. 055 and make a recommendation as to whether •4 the deductions. should be continued without modification, modified, or5 terminated immediately.

6 PART. 2I

7 EXTENDING TEE B&O TAX EXEMPTION FOR FRUIT, VEGETABLE, DAIRY, AND

8 SEAFOOD BUSINESSES

9 Sec. 201. RCW 82. 04. 4266 and 2011 c 2 s 202 ( Initiative Measure10' No. 1107) are each amended to read as follows: .

11 . 1) This chapter does not apply to the value of products or the12. gross proceeds of sales derived from:

13 a) Manufacturing fruits or vegetables by canning, preserving, •14 freezing, processing, or dehydrating :fresh fruits or vegetables; ' or

15 b) Selling at wholesale fruits or .vegetables manufactured by the16 seller by canning, preserving, freezing, processing,, or dehydrating17 fresh •fruits. or vegetables and sold to purchasers who transport in the

18 ordinary course of business the goods out of this state. A person

19 taking an exemption under this subsection (1) ( b) must keep and preserve20 records for the period required by _RCW-. 82. 32. 070 . establishing that the21 goods were transported by the purchaser in the ordinary course of

22 ' business out of this state.

23 2) A person claiming. the exemption provided in this .section must24 file a complete annual survey with the department under RCW • 82. 32.. 585.25 3) This section expires July I, ( (2012) ) 2015.

26 Sec. 202. RCW 82. 04. 4268 and 2010 c 114 s 112 are each amended to

27 read as follows:

28 1) This chapter does not apply to the value of products or the

29 gross proceeds of sales derived from

30 a) Manufacturing dairy products; or

31 b) Selling manufactured dairy products to purchasers who• transport

32 in the •ordinary course of business the goods out of this state. A

33 person taking an •exemption under' this subsection ( 1) ( b) _must keep and

34 preserve records for the period required by RCW 82 . 32. 070 establishing.

ESB 6635 p. 4

APPENDIX

E

1970 .

App. 3, Page 001

i

r

1970 1st ex. seas. C41st Lewis. 2nd ex, seas.) Ch. 100. 101

private carrier bus whenever but only whenever such vehicle is

stopped on the highway for the purpose of receiving or dischargingpassengers, excepts

a) When the passengers boarding or alighting do not have to

cross a highway and the bus is' stopped completely off the main

traveled portion of the roadway; or

b) When the bus is stopped at an intersection or place where

traffic is controlled by a traffic officer or official traffic

control signal.

3) The driver of a vehicle upon a highway divided into sepa-

rate roadways as provided in RCS 46. 61. 150.. need not atop upon meet-

ing or passing a private carrier bus which is on a separate roadway

or-when upon a limited access highway and the private carrier bus is

stopped in a loading sone which is a part of or adjacent to such

highway and where pedestrians are not-permitted to cross the roadway.

NEW SECTION. Sec. 9. This 1970 amendatory act is necessary

for the immediate preservation of the public peace, health and safety

the support of the state government and its existing public institu-

tions, and shall take effect immediately.

Passed the amuse February 12. 1970

Passed the Senate February 12, 1970Approved by the governor February 20, 1970Piled in Office of Secretary of State February 24. 1970

CSAPTER 101

Engrossed Substitute Souse Bill So. 232]TAXES-- DEDUCTIONS-= FINABCIAI. INSTITOTIOSB--

MASS OF STOCK

AN ACT Relating to revenue and taxation; amending section 79. chap-

ter 235, Laws of 1945 and RCW 33. 28. 040; amending section 82-

04. 430, chapter 15. Laws of 1961 as last amended by section

11. chapter 173. Lawn of 1965 ex. sees. and RCW 82. 04. 430;

adding a new section to chapter 15. Laws of 1961 and to chap-

ter 82. 04 RD repealing section 82. 04. 400, chapter 15, fansof 1961. section 1, chapter 136, Laws of 1963. section 8,

chapter• 173, Laws of 19651i

ex. seas., section 1, chapter 246.

1771]

App. 3, Page 002

Ch. 101 1970 1st ex. secs. ( 41st Leais. 2nd ex. sess,)

Laws of 1969 ex. sess., and RCW 82. 04. 400; repealing sections84. 40. 270, 84. 40. 280, 84; 40. 290, 84. 40. 300 and 84. 40. 310.

chapter 15. Laws of 1961: and RCW 84. 40. 270. 84. 40. 280, 84. 40-

290. 84. 40. 300 and 84. 46. 310; prescribing an effective date;.

and declaring an emergency.

BB IT EXACTED BS TEE LEGISLATURE OP THE STATE OP WASHINGTON:,

Section 1. Section 79, chapter 235. Laws of 1945 and RCW 33-

28. 040 are each amended to read as follows:

The fees herein provided for shall be in lien of all other

corporation fees, licenses, or excises for the privilege of doing

business, except for business and occupation taxes imposedoursuant

to Chapter 82. 04 RCW. notwithstanding any other provisions of this

section."

Neither an association nor its members shall be taxed upon ita

savings accounts as property. An association shall be taxable upon

its real and tangible personal property.

An association is a mutual institution for savings and neither

it nor its property shall be taiced under any law which shall exempt

banks or other savings institutions from taxation.

for all purposes of taxation. the assets represented by the

contingent fund and other reserves ( other than reserves for expenses

and specific losses) of an association shall be deemed its only per-

manent capital and. in computing any tax. Whether property. income,

or excise. appropriate adjustments ahall_be made to give effect to

the mutual nature of such association.

See. 2. Section 82. 04. 430. chapter 15. Laws of 1961 as last

amended by section 11. chapter' 173. Laws of 1965 ex. sees., and RCW

82. 04. 430 are each amended to read as follows:

In computing tax there may be deducted from the measure of

tax the following items:

1) Amounts derived by persons, other than those engaging in

banking, loan; secutity, or other financial businesses, from invest-

ments or the use of money as snch. and also amounts derived as diva-772)

i1

1442. : Iv Page 003

1970 1st ex. seas. ( 41st Legis. and ex. seas.) Ch. 101

deeds by a parent from. its subsidiary corporations;2) Amounts derived froh bona fide initiation fees, dues,

contributions, donations, tuition fees, charges made for operation o: .

privately operated kindergartens, and endowment funds. This pare- .

graph shall not•be construed to exempt any person. association, or

society from tax liability uponiseiling tangible personal property

or upon providing facilities or. services for Which a special charge

is made to members or others. Dues which are for, or graduated upon

the amount of service rendered by the recipient thereof are not par-

mitted as a deduction hereunder)

3) The amount of cash discount actually taken by the per-chaser. This deduction is not allowed in arriving at the taxable

amount under the extractive or manufacturing classifications with re-spect to articles.produced or manufactured,' the reported values of

which, for the purposes of this tax, have been computed according to

the provisions of RCW 82. 04. 450; i

4) The amount of credit losses actually sustained by tax-

payers Whose regular books of account are kept upon an accrual basis;

5) So much of the sale price of motor vehicle fuel as con-

stitutes. the amount of tax imposed by• the state or the United States .

government upon the sale thereof;

6) Amounts derived from business which the state is prohib-

ited from taxing under the Constitution of this state. or the Consti-

tution or laws of the United States;

7) Amounts derived by alny person as compensation for the

receiving, washing, sorting, and packing of fresh perishable horti- •

cultural products and the material and supplies used therein when

performed for the person exempted in RCW . 82. 04. 330. either an agent

or as independent contractor;

8) Amounts derived as •ccmpensation for services rendered or

to be rendered to patients by a hospital, as defined in chapter 70. 41,

devoted to the care of human beings with respect to the prevention

or treatment of disease, sickness, or suffering. when such hospital773J

I

App. 3, Page 004

Ch. 101 1970 1st ex. sees. 141st logic. 2nd ex. sees.)

is operated by the United States or any of its instrumentalities, or

by the state. or any of its political subdivisions;

9) Amounts derived as compensation for services rendered to

patients by a hospital, as defined in chapter 70. 41, Which is oper-

ated as a nonprofit corporation, nursing homes and homes for unwed

mothers operated as religious or charitable organizations, but only

if no part of the net earnings received by such an institution inures'

directly Or indirectly, to any person other than the institution en- '

titled to deduction hereunder, in no event shall any such deduction

be allowed, unless the hospital building is entitled to exemption

from taxation under the property tax laws of this stateL10) by those engagedlin banking, loan, security or other

financial businesses, amounts derived from interest received on in-

vestments or loans primarily secured by first mortgages or trustdeeds on nontransient residential properties:

Ill av those engaged in banking, loan, security or other

financial businesses, amounts` derived from interest paid on all ob-

ligations of the state of Ranh ington, its political subdivisions, and

municipal corporations organized pursuant to the laws thereof.

12) Amounts derived as interest on loans by a lending

institution Which is owned exclusively. bv its borrowers or members

and which is engaged solely in the business of making loans for agri-

cultural production.

NEW SECTION. Sec. 3. ; There is added to chapter 15, Laws of

1961 and to chapter 82. 04 RCW a new section to read as follower

This chapter shall not apply to the gross income of credit

unions organized under the laws of this state or the United States.

NEW SECTION.. Sec. 4. The following acts or parts of acts are

each repealed&

1) Section 82. 04. 400; chapter 15, Laws of 1961, section 1.

Chapter 136, Laws of 1963, section 8, chapter 173, Laws of 1965 ex.

seas., section 1, chapter 246. Laws of 1969 ex. sess.. and RCw 82-

774]

App. 39 Page.0®5

j.

1970 1st ex. sass. ( 41st Loris. 2nd ex. seas.) Ch. 101, 102

04. 400:

2) Sections 84. 40. 270. 84. 40. 280, 84. 40. 290, 84. 40. 300, and

84. 40. 310. chapter 15, Laws of 1961, and RCW 84. 40. 270. 84. 40. 280.

84. 40. 290. 84. 40. 300, and 84. 40. 310.

NEW SECTION. Sec. 5. if zlny provision of this act, or its

application to. any- person or circumstance is held' invalid, the re-

mainder of the act, or the application of the provision to other

persons or circumstances is not affected.

SEW SECTION; Sec. 6. This act is necessary for the immediate

preservation of the public peace, )health and safety, the support of

the state government and its existing public institutions,- And shall

take effect March 1. 1970.

Passed the Souse February 12. 1970Passed the Senate February 12, 1970Approved by the Governor. Februark 20, 1970Filed in Office of Secretary of State February 24. 1970

cS PTBR 102

Engrossed Rouse Bill Mo. 2531COLIEGES AND UNIVERSITIES--

STET FEES--

cOt44ISSXON OS HIG855 EDUCATION

AN ACT Relating to. higher educations amending section 2, chapter 66.

Laws of 1915 as last amended by section 1, chapter 181. Laws of

1963 and RCW 28. 77. 0307 amending section 1, chapter 164. Laws

of 1921 as last amended by.;aection 1, chapter 180, Laws of 1963

and RCW 28. 80. 0307 amending section 3, chapter 13, Laws of 1961

ex. sees. as amended by section 10, chapter 47. Laws of' 1967

and RCS. 28. 81. 0807 amending section 288. 15. 200, chapter 223,

Laws of 1969 ex. sees. and• RCW 280. 15. 2007 amending section

288. 15. 300. chapter 223, Laws of 1969 ex. seas. and RCW. 288. 15-

300; and emending section -288. 15. 400, chapter 223, Laws of

1969 ex. seas. and RCW 288. 15. 400; amending section 2, chapter

263, Laws of 1969 ex. seas.' and RCW 28. 90. 110 end RCW- 28B. 81-

020; declaring an emergency; and providing for the expirationof sections thereof.

BE IT ENACTED BT TEE LEGISLATURE- OF TSB STATE of W% SI e

775]_

I

App. 3, Page 006

i

t

App. 3, Page 007

i .

1980

SESSION LAWSOF TFIE

STATE OF WASHINGTON

1980 REGULAR SESSION

FORTY-SIXTH LEGISLATURE

Cc i ei d J unaty 14, 1980. Adjouaaed Maids 13. 19®0.

STA2.14/

Newt

oml

r,

z4

Wes

l. 1889

Published at Olympia by the Statute Law Committee pursuant to Chapter 6,Laws of 1969•

DENNIS W. COOPER

Code Reviser

1

App. 3, Page 008

WASHINGTON LAWS, 1980 Cb. 37

be brought later.than April 15. 1980, or. thirty days from the effective dateof this act,:whlcbever is later. Notice of provisions of this subsection shill bepublished:within five days after the cdfective date of this section of this 1980actin a newSpaper of general ci'reulation within:each county where.* schooldisrict-election. vvas• held Cr February 5. 1980. and where•notice Of such. •election Was nor published asjwovided is subsection( I) of this section:

NEW SECTION: Sec. 9. Section 8 of this 1980' act is necessary for theimmediate preservation of the public peace, health,•and safety,. the supportof-thestate government and its existing public institutions, and 4hall takeeffect immediately.

NEW SECTION. Sec. 10. if any provision of this amendatory act or itsapplication to.any person' or circumstance is held invalid, the remainder-ofthe act.or the application of the provision to other persons or circumstancesis not affected. •

Passed the House February 21. 1980.Passed the Senate February 15, 1980.Approved by the Governor February 28, 1980.Filed in Office of•Sec etary ofiState February 28. 1980.

CHAPTER 36Hausa am No. 277]

COMIC HOOKS

AN ACT' Relating to comic boots and repealing sections I through 15, chapter 282, Laws of1955 and aCW 19. 18.010 through 19. 18.900.

Be it enacted by the Legislature of the State of Washington:NEW SECTION. Section I. Sections 1 through IS, chapter 282, Laws

of 1955 and.RCW 19. 18.010 through 19. 18.900 are each repealed:

Passed' the House January: 14, 1980.Passed the Senate February 18, 1980.Approved by the Governor February 29. 1980. • -Ftiled in•Office ofSecretary•of:State February 29. 1980.

CHAPTER 37 .

SLIIIStmais Hansa Bail No. 1016]EXCISE TAX EXEMPTIONS.'DEDUC IONS— SECrION DIVISION.

RECODIFICATION

AN ACT Rdatina to the readiheation of cahting endue.tax aemptionc and dedoetiona di-siding sales tan:eiemptlosu,-nse tax exemptions. and butntzss and ion tai dedon. .tiros into separate soetima; amending section- 82.04.425. chapter 15,: Laprs of 1961 asamended by section 9, chapter 173. Laws of 1965 ea. sera. and RCW 82.04.425; amendingsaaioo. 82.ILA70,-chapter 15. taws of 1961 as last amended. by section 3. dapter 324.Law of 1977 ex. saes. and RCW 82.12.020; amendIog section 6, chapter 196. taws of

831

App. 3, Fags: 009

Ch. 37 WASHINGTON LAWS, 1980

1979 ea. ease. and RCW 82.00.431; adding new sections to chapter 15, laws of 1961 andto chapter 82.04 RCW; edemas new sections to chapter 15, Laws of 1961 and to chapter82.08 RCW; adding new sects to chapter IS, Laws of 1961 and to chapter 82. 12 RCW;creating a new= dog repeafing section 82.04.430. chapter 15. Laws of 1961. welkin 5.chapter 293. Laws of 1961, section II, chapter 173, Laws of 1965 ea. sass.. section 5,chapter 65. Laws of 1970 ea. seas. section 2. chapter 101. Laws of 1970 ea. seas., sectionI, chapter 13, Laws of 1971, section 1. chapter 105, Laws of 1977 re. sat. aeon 5,chapter 196, Laws of 1979 a.sea. and RCW 82.04.430 repealing section 1, chapter 12,Laws of 1979, section 6. chapter 266, Laws of 1979 cot. sea. and RCW 82.08.030 repeal-log section 2, chapter 12, Laws of 1979, adction 7, chapter 266, Laws of 1979 ea. seas. andRCW 82 12.031% and declaring an emergency:

Be it enacted by the Legislature of the State of Washington:NEW SECTION. Section I. The separation of sales tax exemption. use

lax exemption. and business and occupation deduction sections into shortersections is intended to improve the readability and facilitate the futureamendment of these sections. This separation shall not change the meaningof any of the exemptions or deductions involved.

NEW SECTION. Sec. 2. There is added to chapter 15, Laws of 1961and to chapter 82.04 RCW a new section to read as follows:

In computing tax there may be deducted from the measure of taxamounts derived by persons, other than those engaging in banking, loan,security, or other financial businesses, from investments or the use of moneyas such, aced also amounts derived as dividends by a parent from its subsid-iary corporations.

NEW SECTION. Sec. 3. There is added to chapter 15. Laws of 1961and to chapter 82.04 RCW a new section to read as follows:

In computing tax there may be deducted from the measure of taxamounts derived from bona fide initiation fees, dues, contributions, dona-tions, tuition fees, charges made for operation of privately operated kinder-gartens, and endowment funds. This paragraph shall not be construed to

exempt any person, association, or society from' tax liability upon sellingtangible personal property or upon providing facilities or services for whicha special charge is made to members or others. If dues are in exchange for

any significant amount of goods or services rendered by the recipient thereofto members without any additional charge to the member, or if the dues aregraduated upon the amount of goods or services rendered, the value of such

goods or services shall not be considered as a deduction hereunder.


In computing tax there may be deducted from the measure of tax theamount of cash discount actually taken by the purchaser. This deduction isnot allowed in arriving at the taxable amount under the extractive or man-ufacturing classifications with respect to articles produced or manufactured,the reported values of which, for the purposes of this tax, have been com-

puted according to the provisions of RCW 82.04.450.

1041

App. 3, Page 010

Q.37 WASHINGTON LAWS, 1980

by such an institution inures directly or indirectly, to any person other thanthe institution entitled to deduction hereunder. In no event shall any suchdeduction be allowed, unless the hospital building is entitled to exemptionfrom taxation under the property tax laws of this state.

NEW SECTION. Sec. 11. There is added to chapter 15. Laws of 1961and to chapter 82.04 RCW a new section to read as follow

In computing tax there may be deducted from the measure of taxamounts derived by a political subdivision of the state of Washington fromanother political subdivision of the state of Washington as compensation forservices which are within the purview of RCW 82.04290.


In computing tax there may be deducted from the measure of tax bythose engaged in banking, loan, security or other financial businesses,amounts derived from interest received on investments or loans primarilysecured by first mortgages or trust deeds on nontransient residentialproperties.

NEW SECTION. Sec. 13. There is added to chapter 15, Laws of 1961and to chapter 82.04 RCW a new section to read as follow

In computing tax there may be deducted from the measure of tax bythose engaged in banking, loan, security or other financial businesses,amounts derived from interest paid on all obligations of the state ofWashington, its political subdivisions, and municipal corporations organizedpursuant to the laws thereof.

NEW SECTION. Sec. 14. There is added to chapter 15. Laws of 1961and to chapter 82.04 RCW a new section to read as follow

In computing tax there may be deducted from the measure of taxamounts derived as interest on loans to bona fide farmers and ranchers,

producers or harvesters of aquatic products, or their cooperatives by a lend-ing institution which is owned exclusively by its borrowers or members andwhich is engaged solely in the business of making loans and providing fi-nance- related services to bona fide farmers and ranchers, producers or bar-

vesters of aquatic products, their cooperatives, rural residents for housing,or persons engaged in furnishing farm-related or aquatic- related services tothese individuals or entities.

NEW SECTION. Sec. 15. There is added to chapter 15, Laws of 1961

and-to chapter 82.04 RCW a new section to read as follow

In computing tax there may be deducted from the measure of tax bypersons subject to payment of the tax on manufacturers pursuant to RCW

82.04.240, the value of articles to the extent of manufacturing activitiescompleted outside the United States, if:

1) Any additional processing of such artides in this state consists ofminor final assembly only and

1661

App. 3, page Oil

Business and Occupation Tax 82.044298

for services taxable under RCW 82.04.290. In computing 4) The articles are sold and shipped outside the state.tax there may be deducted from the measure of tax amounts [ 1980 0 37§ 15. Formerly RCW 82. 04.430( 14).]derived by a political subdivision of the state ofWashington Intent- 1980 c 37: See note following RCW 82.04.4281.from another political subdivision ofthe state of Washingtonas compensation for services which are within the purview of 82.04.4296 Deductions-- Rdmbarsement for morn- •RCW 82. 04. 290. [ 1980 c 37 § 11. Formerly RCW

modation expenditures by funeral homes. In computing82.04.430( 10).] tax there may be deducted from the measure of tax that parbrtent- 1980 c 37: Set note following RCW 82.04.4281. Lion of amounts received by any funeral home licensed to do

business in this state which is received as reimbursements for82.04.4292 Deductions—Interest on investments or expenditures( for goods supplied or services rendered by a

loans secured by mortgages or deeds oftreat In comput- Person not employed by or affiliated or associated with thelog tax there may be deducted from the meat= of out by funeral home) and advanced by such funeral home as anthose engaged in banking, loan, security or other financial accommodation to the persons paying for a fimerul, so longbusinesses, amounts derived from interest received on invest- as such expenditures and advances are billed to the personsmeets or loans primarily secured by first mortgages or trust Paying for the funeral at only the exact cost thereof and aredeeds on noatransient residential properties. [ 1980 0 37§ 12. fly itemized in the billing statement delivered to suchFormerly RCW 82.04.430( 11).] persons. [ 1980 c 37§ 16. Formerly RCW 82.04.430( 15).]

Intent- 1980 a 37: See note following RCW 82.04.4281. Intea1—1980 a 37: See noes fnDowioig RCW 82.04.4281.

82.04.4293 Deductions—Interest on obligations of82.04.4297 Deductions-- Comps safion S ono public

the state, its political subdivisions, and municipal corpo-entities for health

there

social

sveeduct servitxheException.

rations. In computing tax there may be deducted from theIn computing tax these may be

Unitedfrom the measure of

measure oftax by those engaged in banking, loan, security mtax amounts received from the United States or any or anyother financial businesses, amounts derived from interestme 4ty thereof or from rho state of Washington or any

paid on all obligations of the state ofWashington, municipal corporation or political subdivision thereof as .Dg°®' political

far, or to support, health or social welfare setsubdivisions, and municipal corporations organized pursuant

compensation

rendered by a health or social welfare organization orto the laws thereof. [ 1980 c 37 § 13. Formerly RCWby a municipal corporation or political subdivision, except82.04.430( 12).]deductions are not allowed under this section for amounts

retest- 1980 a 37: See note following RCW 82.04.4281. that are received under an employee benefit plan. [ 2002 c

314§ 3; 20012nd sp.s. c 23§ 2; 1988 c 67§ 1; 1980 c 37§82.04.4294 Deductions—Interest on loans to farmers 17. Formerly RCW 82.04.430( 16).]

and ranchers, producers or harvesters of aquatic prod- p ) telend of - 8aeettve ram—aunt e 314c See notesnets, or their cooperatives. In computing tax there may be following RCW 82.04.4311.deducted from the measure of tax amounts derived as interest Fhadinp—anal 2nd sp.e. a 23: ' The legislature finds that the dolm-

an loans to boas fide farmers and ranchers, producers or her- teen under the business and= Wad= nor statutes for= Weaned=ed= from

vesteis ofaquatic products, or their 000perstfves by a lending public entities for health or social weltise services was intended to provide

institution which is owned exclusively its borrowers or0ni with rZer p ' It Tarwhen government provide

members and which ise fhrthe ptvvft3on ofhealth err mcmt welfan tesvices t' boa-•

engaged solely in the business ofmak- etitad classes ofpersona The e also Ends that both the lea

ing loans and providing finance-related services to bona fide and the united States= arms have in retest yearn modified goverrmeat•

farmers and ranchers, producers or harvesters of aquaticfoodal hearth cue programs to woourage p by besatidmies is

products, their cooperatives, rural residents for housing, ora be

govcarentmitlanddhelit and vws ae

parsons engaged in furnishing farm-related or aquatic-related organizations. The legislature Rather fords that the objective of theseservices to these individuals or entities. [ 1980 c 37§ 14. For- la ay%to Wend the eurehalliellPower ofscan itomarareed health

mercy RCW 82.04.430( 13).] ease reaamces, but that this objective would be thwarted to a significantdegree if the business and occopadon tax dedardoa were lost by health or

Janet- 1980 c 37: See note following RCW 82.04.4281. social waive organizations solely on occoant of their partite in man-aged care for goveratanos-funded health programs. in keeping with the orig-

82.04.4295 Deductions-- Manufaetnrf activitiesgy purpose ofthehe lteorsocialwelfarededution, kisdedrabletoemme

ng test eatopmeuttoa received tuna government emcee Onuag t coehsetralcompleted outside the United States. In computing tax managed eoe laograma also be deductible." [ 2001 2nd sp.s. c 23 11.)there may be deducted from the measure of tax by persons Effective date- 2001 Ind sp.e. e 23: " This act is necessary for thesubject to payment of the tax on manufacturers pursuant to immediate preservation of the public peace, health, or safety. or= Met ofRCW 82.04.240, the value of articles to the extent of mann- the state goverment and its existing public institution„ sad tab' s effect

factoring activities completed outside the United States, ate'[ July[July 13, 20011.*[ 2003 Ind ep.s c 23§ 4.]if

1) Any additional processing of such articles in thisb°` 19m a s7: See nos' following RCW S2 oa.a28t.

or soHeathstate consists of minor final assembly only; and

soda welfare erg rior" dgfbeedfor RCW 82.04.4297-- Con-

dUlons for exemption— Wealth or, octal welfare soviets" dgfraed2) In the case of domestic manufacture of such articles, RCW 8Z04.431.

can be and normally is done at the place of initial manufac-ture; and 82. 04.4298 Deductions—Repair, maintenance,

3) The total cost of the minor final assembly does not replacement, etc., of residential structures and commonlyexceed two percent of the value of the articles; and held property—Eligible organizations. ( 1) In computing

2004 Ed.) rltie 82 RCW—page 411

App. 3, Page 012

2010

App. 3, Page 013

CERTIFICATION OF ENROLLMENT

SECOND ENGROSSED SiMSTITuTE SENATE SILL 6143.

Chapter 23, Laws of 2010.

61stl,Legisiature '-

2010 1st< Special Session

s

EFFECTIVE DATE: Various

Passed by the Senate April 12, 2010. E CERTIFICATEYEAS 25 NAYS 21 s

I, . Thomas Hoemaim, • Secretary ofthe Senate , of the State of

SRAD ow= Washington,. do hereby certify thatthe attached is SECOND. ENGROSSED

President of the Senate SUBSTITUTE SENATE BILL 6143_ as

Passed by the House April 10, 2010passed by the Senate and the House

YEAS 52

the Hof Representatives on the dates

hereon set forth.

FRANK moil" . 1- THOMAS HONMANN

Speaker of the House of RepresentativesSecretary' .

Approved April 23, 2010, 1: 44 p. m. FILED

April 23, 2010

1

CHRISTINE GREGOIRE E Secretary of State

Governor of the State of,WashingtonState of Washington

App. 37 Page 014

I1

1 exercise of the option would: result in a sale : as defined in RCW

2 82. 45. 010( 2) ..

3 b) The disclosure requirement in this subsection only applies to4 entities owning an interest in real property located in this state.5 . 2) This information ( ( must be made available to the

6 department of revenue upon , request for the purposes of tracking the7 transfer of the controlling interest in entities owning real property8 and to• determine when the real :estate excise tax is applicable in such9 cases.

10 3) For the purposes of this section, " controlling interest" has .

11 the same meaning as provided in.RCW 82. 45: 033.

12 PART III

13 Modifying the First Mortgage •Deduction

14 Sec_ 301. RCW 82. 04. 4292 and 1380 o .37 s 12 are each amended to

15 read as follows:

16 . 1),. In computing tax thereimay be deducted from the measure of tax17 by those engaged in • banking, loan, security' or other financial

18 businesses; ( ( interest received on investments

19 or loans primarily. secured by first mortgages or trust deeds on

20 nontransient residential

properrties. .

21 2) Interest deductible under this section includes the portion of .22 fees charged to borrowers. including points and loan origination' fees23 that is recognized over the life of the loan as an adjustment to yield24 in the taxpayer' s books and records according to Generally accepted25 accounting principles.

26 3) Subsections ( 1) and ( 2) of this section notwithstanding. the

27 following is a nonexclusive list of items that are not deductible under28 this' sections

29 a) Pees for specific•.sezvices such as: Document preparationfees:

30 finder fees: brokerage fees: tittle examination. fees: fees for credit

31 checks: notary fees; loan .applicatioa fees: interest lock- in fees if

32 the loan is not made: servicing; fees and : imilar fetes ' car amounts:.

33 b) Fees received in consideration for an agreement to make funds

34 available for a . specific period of time at. specified terms. commonly

35 referred to as commitment fees; 3

2ESSB 6143. SL p. 34

App. 3, Page 015

1 • c) Any other tees. or portion of a fee, that is not recognized2

over• the life of the loan as ap adjustment to yield in the taxpayer' s3 books_ and records_ according to generally accepted accounting4 - principles: -

5 d) Gains on the .sale of valuable _rights suc4 as service release6 premiums. which are amounts received when servicing rights are sold;7 and

8 e) Gains on the sale of loans, except deferred loan origination9 . tees and noints deductible under subsection 12) of this section, are

10 not to be considered part of the proceeds of sale of' the loan. •11 4) Notwithstanding subsection ( 3) of this section. in computing12 tax there may be deducted from the measure of tax by those a• gaged13 : banking. loan. _ aecurit,y. or. other_ financial_ businesses. amounts,

14 received for servicing loans primarily secured by first mortgages . 22E.15 trust deeds on nontransient residential properties. including such

16 loans that secure• mortgage- backed o mortgage- related securities, but

17 . only if:

18 a) ( i) The loans were _originated by the person Claiming a deduction19 under this subsection (4) and that person either sold the loans on the20 pecondary market or securitized the loans and sold the securities- on21 the secondary market; or

22 iii (A). The person claiming a deduction under this subsection (4)

23 acquired the loans from the person that originated the loans through a,

24 merger or acquisition of substantially all of the assets of the person

25 who originated the loans, or the person claiming a deduction under this

26 subsection ( 4) is affiliated with the person that originated the loans.

27 For_ purposes of this subsection._" affiliated" means under common

28 control. " Control" means the ' possession. directly or indirectly. of

29 more than_fifty percent of the power to direct or cause the direction

30 ' of_ t a management and policies pi a person, ' ,whether. through the

31 ownership of voting shares, by 'contract. or otherwise; and

32 B) Either the person who originated the loans or the person

33 claiming a deduction under this subsection ( 4) sold the loans on the

34 secondary market or securitized the loans and sold the Securities on35 the secondary market; and

36 b) The amounts received for servicing the loans are de ermined by37 a percentage of the interest paid by the borrower and are only received

38 if the borrower makes interest bavments.

p. 35 2ESSB 6143. SL

App. 3, Page 016

WgiCavv. Nvesei RCWA 82.04.4292

Page 1

West's Revised Code ofWashington Annotated CurrentnessTitle 82. Excise Taxes( Refs& Annosl

Chapter 82.04. Business and Occupation Tax/ Refs& Annosl

e.g..82.04.4292. Deductions—Interest on Investments or loans secured by mortgages or deeds of trust

1) In computing tax there may be deducted from the measure of tax by those engaged in banking, loan, security orother financial businesses, interest received on investments or loans primarily secured by first mortgages or trust deedson nontransient residential properties.

2) Interest deductible under this section includes the portion of fees charged to borrowers, including points and loanorigination fees, that is recognized pver the life of the loan as.an adjustment to yield hi the taxpayer's books and rec-ords according to generally accepted accounting principles;

3) Subsections( I) and( 2) ofthis section notwithstanding, the following is a nonexclusive list of items that are notdeductible under this section:

a) Fees for specific services such as: Document preparation fees; finder fees; brokerage fees; tide examination fees;

fees for credit checks; notary fees; loan applicationfees; interest lock-in fees if the loan is not made; servicing fees;and similar fees or amounts;

b) Fees received in consideration for an agreement to make funds available for a specific period of time at specified

terms; commonly referred to as commitment fees;

c) Any other fees, or Portion ofa fee, that is not recognized over the life of the loan as an adjustment to yield in thetaxpayer's books and records according to generally accepted accounting principles;

d) Gains on the sale ofvaluable rights such as service release premiums, which are amounts received when servicingrights are sold; and

e) Gains on the sate of loans, except deferred loin origination fees and points deductible under subsection( 2) ofthissection, are not to be considered part ofthe proceeds of sale of the loan.

4) Notwithstanding subsection( 3) ofthis section, in Computing tax there may be deducted fromthe measure of tax bythose engaged in banking, loan, security, or other financial businesses, amounts received for servicing loans primarilysecured by first mortgages or trust deeds on nontransient residential properties, including such loans that accusemortgage-backed or mortgage-related securities, but only it

a)( i) The loans werenriginated by the person claiming a deduction under this subsection( 4) and that person eithersold the loans on the secondary market or securitizedithe loans and sold the securities on the secondary xuarke4 or

ii)(A) The person claiming a deduction under this subsection( 4) acquired the loans from the person that originatedthe loans through a merger or acquisition ofsubstantially all of the assets ofthe person who originated the loans, or the

0 2012 Thomson Reuters. No Claim to Orig. US Gov. Works. App. 3, Page 017

West's RCWA 82.04.4292Page 2

person claiming adeduction under this subsection( 4) is affiliated with the person that originated the loans. For pur-poses ofthis subsection," affiliated" means under.comnmon control." Control" means the possession, directly or in-directly, ofmore than fifty percent ofthe power to direct or cause the direction of the management and policies ofapin,whether through the ownership ofvoting shares, by contract, or otherwise; and

B) Either the person who originated the loans or the person claiming a deduction under this subsection( 4) sold the •loans on the secondary market or securitized the loans and sold the securities on the secondary market; and

b) The amounts received for servicing the loans are determined by a percentage of the interest paid-by the borrowerand are only received ifthe borrower makes interest payments.

CREDIT(S)

12010 1st rims. c 23 6 301, eff lune 1, 2010; 1980 c 37§ 12. Formerly lt.CW 82. 04-430(11).] •

Current with all Legislation from the 2011 2nd Special Session and 2012 Legislation effective thirough May 31, 2012

C) 2012 Thomson Reuters.

END OF DOCUMENT

i

1 '

2012 Thomson Reuters) No Claim to Orig. US Gov. Works.App. 3, page.016

f

2Ü12

11

App. 3,. Page 019

CERTIFICATION OF ENROLLMENT • •

ENGROSSED SENATE BILL 6635

Chapter 6, Laws of 2012

62nd, Legislature2012 2nd; Special Session

TAX PREFERENCES MID LICENSE FEES

EFFECTIVE DATE:' Parts III and IV effective 05/ 02/ 12; Parts I, II,and V through.VII effective 07/ 01/ 12; Sections 302 and 303 arecontingent

Passed by the Senate April 11, 2012 CERTIFICATEYEAS 35 NAYS 10

I, Thomas Ho m nn, Secretary ofthe Senate of the State of

BRAD OWEN_ Washington, do hereby certify that

President of the Senatethe attached is. ENGROSSED SENATE'

BILL 6635. as passed by the SenatePassed by the House April 11, 2012

and the House of Representatives

YEAS 74 NAYS 24on the dates hereon set forth.

FRANK CHOPPTHOMAS NORMANS

SecretarySpeaker of the House of Representatives

C

Approved May 2, 2012, 2: 10 p. m. PILED •

May 2, 2012

CHRISTINE GREGOIR8 Secretary of State

oovernor of the State of WashingtonState of Washington

G

App. 3, Page 020

ENGROSSED. SENATE BILL 6635 •

Passed Legislature - 2012 2nd Special Session

State of Washington 62nd Legislature 2012 . 2nd Special Session

By Senators Murray and Kline

Read first time 04/ 04/ 12. Referred to Committee on Ways & Means.

1 AN. ACT Relating to improving revenue and budget sustainability by2 repealing, modifying, or revising tax preference and license fees;

3 amending RCW 82. 04. 4292, 82. 64. f4266, 82. 04: 4266, 82. 04. 4269, 82. 04. 260,

4 82. 08. 986, 82. 08. 986, 82. 12. 986, 66. 24. 630, 82. 29A. 020, 82. 04. 214, and

5 82. 04. 260; adding a new section to chapter 82. 04 RCW; - creating new

6 sections; providing an effective. date; providing a contingent effective

7 date; providing expiration dates; and declaring an emergency.

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

9 PART I

10 LIMITING TEE FIRST INTEREST MORTGAGE B&O DEDUCTION TO COMMUNITY BANKS

li NEW SECTION. Sec. _ 101. A new section is added to chapter 82. 0412 RCW to read as follows:

13 1) Amounts received as interest on loans originated by a person14 located in more than ten states, or an affiliate of such person, and

15 primarily secured by . first mortgages or trust deeds on nontransient16 residential properties are subject to tax under RCW 82. 04. 290( 2) ( a) .

17 • 2)• For the purposes of this subsection, a person is located in a

18 state if:

I p. 1 ESE 6635: SL

App. 3, Page 021

1 a) The person or an affiliate of the person maintains a branch,2 office, or one or more employees or representatives in the state; and

3 b) Such instate presence allows borrowers or potential borrowers4 to contact the branch, office, lemployee, or representative concerning5 the acquiring, negotiating, renegotiating, or restructuring' of., or

6 making payments on, mortgages 4.ssued or to be issued .by the person or .7 an' affiliate of the person.

8 3). For purposes of this section:

9 a) " Affiliate" means a person is affiliated with another person,

10 and " affiliated" has the same meaning as in RCW 82. 04. 645; and - •

11 b) " Interest" ,has ' the same meaning as in RCW 82. 04. 4292 and also12 ' includes servicing fees described in RCW 82. 04. 4292( 4) .

13 Sec. 102.. RCW 82. 04. 4292 and 2010 1st sp. s. c 23 - s 301 are each

14 . amended to read as follows: ;

15 1) In computing tax there=may be deducted- from the measure of tax

16 by those engaged in banking, .loan, security or other financial

17 businesses, interest received on investments Or loans primarily secured

18 by first mortgages or trust deeds on nontransient residential.

19 properties.

20 2) Interest deductible under this section .includes the portion of

21 fees charged to borrowers, including points and loan origination fees,

22 that is recognized over the life of the loan as an adjustment to yield

23 in the taxpayer' s books and. records according to generally accepted

24 accounting principles.•

25 3) Subsections ( I) and ( 2) . of this section notwithstanding, the

26 following is a nonexclusive list of items that are .not deductible under27 this section:

28 a) Fees for specific services such as: Document preparation fees;

29 finder fees; brokerage fees; title examination fees; fees . for credit

30 - checks; notary fees; loan application fees; interest lock- in fees if

31 the loan is not made; servicing fees; and similar fees or amounts;

32 b)- Fees received in consideration for an agreement to make funds

33 . available for a specific period of time at specified terms, commonly

34 referred to as commitment fees;

35 c) Any other fees, or portion of a fee, that- is not recognized

36 over the life of the loan as an adjustment to yield in the taxpayer' s

SSB 6635. 8L p• 2

App. 3, Page 022

1 . books and records according to generally accepted accounting2 principles;

3 d) Gains on the sale of valuable rights, such as service release4 premiums, which are ' amounts received when servicing rights 'are sold;5 and

6 e) Gains on the sale of loans, except deferred loan origination

7 fees and points deductible under subsection ( 2) of this section, 'are

8 not ' to be considered part of the proceeds of sale of the loan.9 4) Notwithstanding subsection ( 3) of this section, in computing

10 tax there may be deducted from the measure of tax by those engaged in11 banking, loan, security, ' or other financial businesses, amounts.

12 received for servicing loans primarily secured by first mortgages or '13 ' •' trust deeds on nontransient•' residential properties, ' including such

14 •. loans that secure mortgage- backed or mortgage- related securities, but

15 only i•f: 16 a) ( i) The loans were originated by the person claiming, a deduction17 under this subsection ( 4) and that person either sold the loans on the

18 secondary market or securitized the loans and sold the securities on

19 the secondary market; or j20 ii) (A) : The person claiming a deduction under this subsection ( 4).

21 . acquired the loans. from the person that originated the. loans through a

22 merger or acquisition of_'substantially all of .the assets of the person •

23 who originated the loans, or the person claiming a deduction under this24 subsection ( 4) is affiliated with the person that originated the loans.

25 For purposes of this subsection, " affiliated" means under common

26 control. " Control" means the' possession, directly or' indirectly, of

27 more• than fifty percent of' the•power to direct or cause the direction28 - of the management and policies of a person, whether through the

29 ownership of voting shares, by: contract, or otherwise; and

30 B) Either the person who originated the loans. or the person

31 claiming a• deduction under ' this subsection ( 4) sold the loans on the

32 secondary market or . securitized the loans and sold the securities on33 the secondary market; and

34 b) The amounts received ' for servicing the loans are determined by35 a percentage of -the interest paid by the borrower and are only received36 if the borrower makes interest'.payments. .

37 5) The deductions provided in this section do not apply to persons •

38 subiect to tax under section 101 of this act.

p. 3 ESB 6635. SL

App. 3, Page 023•

1 6) By June 304 2015._ the ioint legislative_audit and review

2 committee must review the deductions provided in this section in3 accordance with RCW 43. 136. 055 and make. a recommendation as to whether4 the deductions should be continued- without modification, modified, or

5 terminated immediately:

6 PART II •

7 EXTENDING THE •B&O TAX EXEMPTION FOR FRUIT, VEGETABLE, DAIRY, AND

8 SEAFOOD BUSINESSES

9 Sec.. 201. RCW 82. 04. 4266 and 2011 C 2 s 202 . ( Initiative Measure .

10 No. 1107) are each: amended to read as follows:

11 1) This chapter does not apply to the value of products or the12 gross proceeds of sales derived from:

13 a) Manufacturing fruits br . vegetables by canning, preserving,

14 freezing, processing, •or dehydrating fresh fruits or vegetables; or

15 b) Selling at Wholesale fruits or vegetables manufactured. by the16 seller by canning, preservings freezing, processing, or dehydrating17 fresh fruits- or vegetables and sold to purchasers who transport in the •

18 ordinary course of business the goods out of this state. A person

19 taking an exemption. under this 'subsection ( 1) ( bY must keep and preserve20 records for the period .required by RCW. 82. 32. 070 establishing that the21 goods were transported by the purchaser in the ordinary course of22. business out of this state.

23 2) A person claiming the exemption provided in this section must24 file a complete annual survey with the department under RCW 82. 32. 585.

25 3) This section expires July 1, •( ( 2012) ) 2015.

26 Sec. 202. RCW 82. 04. 4268 and 2010 c 114 s 112 are each amended to

27 read as follows: •

28 1) This chapter does riot :apply to the value of products or the29 gross proceeds of sales. derived from:

30 a) Manufacturing dairy products; or

31 b) Selling manufactured dairy products to purchasers who transport32 in the ordinary course of business the goods out of this state. A

33 person taking an exemption under this subsection ' (1) ( b) must keep. and34 preserve records for the period required by RCW 82. 32. 070 establishing

i

ESB 6635. SL p. 4

App. 3, Page ®U

1

Ap ENDIx

i

4 •

1 • •

i

1O DEC 21 FV, I: I4

Errors discovered during the pre- argument due diligence check of the printedand scanned versions of Cashmere Valley' s Opening Brief

The chart below lists the errors in the printed brief copy of Appendices C to E:

APP. DECRIPTION

C Excerpt from 2011 Tax Preference Performance Reviews, Report 12- 2 ( 2012),

pages 1, 11, 89- 100: Pages 99- 100 missing

D Excerpt from Chapter 6, Laws of 2012: Pages 99- 100 from App. C founddirectly behind label sheet for App. D and in front of the correct pages ( 1- 4)for App. D

E RCW 82. 04.4292 and Legislative History 1970- 2012: First numbered page is

missing entirely

The chart below lists the errors in the scanned brief copy of Appendices C to E:

APP. DECRIPTION

C Excerpt from 2011 Tax Preference Performance Reviews, Report 12- 2 ( 2012),

pages 1, 11, 89- 100: Pages 99- 100 missing

D Excerpt from Chapter 6, Laws of 2012: Page 99 from App. C found directlybehind label sheet for App. D and in front of the correct pages ( 1- 4) of App. D,page 100 from App. C is missing entirely

E RCW 82. 04.4292 and Legislative History 1970- 2012: No pages missing in thiscopy

7

r71rr;

c°), co `: s

G Ci.

CASO46 0002 ob22c664e1

TABLE OF CONTENTS

I. INTRODUCTION

II. ASSIGNMENT OF ERROR ON CROSSAPPEAL 2

III. STATEMENT OF THE(ISSUES 2

IV. STATEMENT OF THE CASE 2.

V. SUMMARY OF ARGUMENT • g

VI. ARGUMENT 9

A. Standard Of Review 9

B. The Trial Court Erred By Denying The Department' s CR12( B)( 1) Motion To,Dismiss 10

I. Wells Fargo failed to properly invoke the Court' sjurisdiction under the APA. 11

2. The APA is the exclusive means ofjudicial review inthis case. 13

r

C. RCW 82.32.060(4) Does Not Require The Department

To Pay Interest When It Resolves A Tax Controversy ByEntering Into A Closing Agreement. 18

z

1. A taxpayer is entitled to statutory interest onamounts paid" in excess of that properly due." 19

2. An agreement to pay a specific amount to settle a taxcontroversy is not equivalent to a finding or.admission of a tax overpayment. 23

3. The constitutional ban on giving public money toprivate parties has no application to a negotiatedsettlement ofcontested taxes... 24

r

The administrative appeals spanned six tax periods( 1996-2002) and

involved a number ofissues relating to collateralized mortgage deductions, bad

debt deductions, and tax apportionment. CP 484-86. The administrative law

judge( AU) assigned to the appeal, Beth Anne Kreger, held a hearing in Seattle

to consider the consolidated appeal petitions.' CP 469. Wells Fargo was

represented by its Tax Counsel, Andrew Gardner. Id. At the hearing; Mr.

Gardner informed Ms. Kreger that Wells Fargo wished to resolve the matter by

settlement. Id at 3.

Wells Fargo and the Department subsequently exchanged a series of

offers and counteroffers, culminating in the execution ofa closingagreememt2

CP 420-32. A closing agneernent>is the means authorized by statute by which

the Department settles tax controversies. RCW 8232.350. The Department

uses a closing agreement to effect a" full and final settlement" ofthe tax

controversy at issue. CP 300.

The recitals to the closing agreement set forth the refund requests at

The Department' s adi1 inist native appeal proceedings are conducted" informally andin a nonadversarial, uncontested manner." WAC 458-20- 100( 5)( b). Notwithstanding,their nominal designation, the Department' s ALJs are not judges, adjudicative officers, or

third-party.neutrals. Rather, they are employees of the Department" trained in theinterpretation ofthe Revenue Act and precedents established by prior rulings and courtdecisions." WAC 458-20. 100( 5). They act on behalf of the Department, not as neutraldecision makers.

2 On March 26, 2007, Wells Fargo sanmitted a written settlement offer with an attachmentthat identified a" Total Settlement Amount' of$2,470,941. CP 230. On February 15, 2008, theALJ amended" a countenoffier proposing a total refund of$ 1, 840,757 to settle the currentlypending appeals contesting the partial denial refimd requests filed fix 1996- 1999 and 2001-2002." CP 234. On February 20, 2008, Wells Fargo responded with a counteroffer, stating" wepropose refunds for 1996-97 in the amounts of$446,835 and$ 807,934, respectively, and a totalrefund for all years in the amount of$1, 997,685" CP 236.

3

Chirag Shah . Respondent' s Brief,:froin Wells Fargo …...F3 11/ 05/ 20.10 Excerpt from Chirag Shah...

Documents

Transcript of Chirag Shah . Respondent' s Brief,:froin Wells Fargo …...F3 11/ 05/ 20.10 Excerpt from Chirag Shah...