Tax preferences

AN ACT Relating to modifying existing tax preferences; amending 1
RCW 82.08.02565, 82.12.02565, 82.12.022, 82.12.022, 82.14.230, and 2
82.16.310; amending 2017 3rd sp.s. c 37 s 1407 (uncodified); creating 3
a new section; and providing a contingent expiration date.4
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF WASHINGTON:5
NEW SECTION. Sec. 1. The legislature finds that, according to 6
the most recent tax exemption study published by the department of 7
revenue, there are currently 786 tax exemptions for the major state 8
and local tax sources in Washington. A number of these tax exemptions 9
have been unchanged in law for a long time and exist as the result of 10
private interests securing preferential tax treatment. Furthermore, 11
the legislature finds that the state's tax code must be periodically 12
reviewed and updated to ensure that tax policy reflects our modern 13
economy and provides adequate revenue to fund necessary and essential 14
services to support the well-being of Washingtonians. Thus, it is the 15
intent of the legislature to remove these tax preferences in order to 16
increase revenue to the state's general fund to maintain essential 17
state services.18
Sec. 2. RCW 82.08.02565 and 2022 c 16 s 146 are each amended to 19
read as follows: 20
H-3279.3
HOUSE BILL 2723
State of Washington 69th Legislature 2026 Regular Session
By Representatives Ramel, Doglio, Pollet, Lekanoff, Macri, and Kloba
Read first time 02/04/26. Referred to Committee on Finance.
p. 1 HB 2723
(1)(a) The tax levied by RCW 82.08.020 does not apply to sales to 1
a manufacturer or processor for hire of machinery and equipment used 2
directly in a manufacturing operation or research and development 3
operation, to sales to a person engaged in testing for a manufacturer 4
or processor for hire of machinery and equipment used directly in a 5
testing operation, or to sales of or charges made for labor and 6
services rendered in respect to installing, repairing, cleaning, 7
altering, or improving the machinery and equipment.8
(b) Except as provided in (c) of this subsection, sellers making 9
tax-exempt sales under this section must obtain from the purchaser an 10
exemption certificate in a form and manner prescribed by the 11
department by rule. The seller must retain a copy of the certificate 12
for the seller's files. 13
(c)(i) ((The)) Until July 1, 2027, the exemption under this 14
section is in the form of a remittance for a gas distribution 15
business, as defined in RCW 82.16.010, claiming the exemption for 16
machinery and equipment used for the production of compressed natural 17
gas or liquefied natural gas for use as a transportation fuel.18
(ii) A gas distribution business claiming an exemption from state 19
and local tax in the form of a remittance under this section must pay 20
the tax under RCW 82.08.020 and all applicable local sales taxes. 21
Beginning July 1, 2017, the gas distribution business may then apply 22
to the department for remittance of state and local sales and use 23
taxes. A gas distribution business may not apply for a remittance 24
more frequently than once a quarter. The gas distribution business 25
must specify the amount of exempted tax claimed and the qualifying 26
purchases for which the exemption is claimed. The gas distribution 27
business must retain, in adequate detail, records to enable the 28
department to determine whether the business is entitled to an 29
exemption under this section, including: Invoices; proof of tax paid; 30
and documents describing the machinery and equipment.31
(iii) The department must determine eligibility under this 32
section based on the information provided by the gas distribution 33
business, which is subject to audit verification by the department. 34
The department must on a quarterly basis remit exempted amounts to 35
qualifying businesses who submitted applications during the previous 36
quarter. 37
(iv) Beginning July 1, ((2028)) 2027, a gas distribution business 38
may not apply for a refund under this section or RCW 82.12.02565.39
(2) For purposes of this section and RCW 82.12.02565:40
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(a) "Machinery and equipment" means industrial fixtures, devices, 1
and support facilities, and tangible personal property that becomes 2
an ingredient or component thereof, including repair parts and 3
replacement parts. "Machinery and equipment" includes pollution 4
control equipment installed and used in a manufacturing operation, 5
testing operation, or research and development operation to prevent 6
air pollution, water pollution, or contamination that might otherwise 7
result from the manufacturing operation, testing operation, or 8
research and development operation. "Machinery and equipment" also 9
includes digital goods. 10
(b) "Machinery and equipment" does not include:11
(i) Hand-powered tools; 12
(ii) Property with a useful life of less than one year;13
(iii) Buildings, other than machinery and equipment that is 14
permanently affixed to or becomes a physical part of a building; and15
(iv) Building fixtures that are not integral to the manufacturing 16
operation, testing operation, or research and development operation 17
that are permanently affixed to and become a physical part of a 18
building, such as utility systems for heating, ventilation, air 19
conditioning, communications, plumbing, or electrical.20
(c) Machinery and equipment is "used directly" in a manufacturing 21
operation, testing operation, or research and development operation 22
if the machinery and equipment: 23
(i) Acts upon or interacts with an item of tangible personal 24
property; 25
(ii) Conveys, transports, handles, or temporarily stores an item 26
of tangible personal property at the manufacturing site or testing 27
site; 28
(iii) Controls, guides, measures, verifies, aligns, regulates, or 29
tests tangible personal property at the site or away from the site;30
(iv) Provides physical support for or access to tangible personal 31
property; 32
(v) Produces power for, or lubricates machinery and equipment;33
(vi) Produces another item of tangible personal property for use 34
in the manufacturing operation, testing operation, or research and 35
development operation; 36
(vii) Places tangible personal property in the container, 37
package, or wrapping in which the tangible personal property is 38
normally sold or transported; or 39
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(viii) Is integral to research and development as defined in RCW 1
82.63.010. 2
(d) "Manufacturer" means a person that qualifies as a 3
manufacturer under RCW 82.04.110. "Manufacturer" also includes a 4
person that: 5
(i) Prints newspapers or other materials; or 6
(ii) Is engaged in the development of prewritten computer 7
software that is not transferred to purchasers by means of tangible 8
storage media. 9
(e) "Manufacturing" means only those activities that come within 10
the definition of "to manufacture" in RCW 82.04.120 and are taxed as 11
manufacturing or processing for hire under chapter 82.04 RCW, or 12
would be taxed as such if such activity were conducted in this state 13
or if not for an exemption or deduction. "Manufacturing" also 14
includes printing newspapers or other materials. An activity is not 15
taxed as manufacturing or processing for hire under chapter 82.04 RCW 16
if the activity is within the purview of chapter 82.16 RCW.17
(f) "Manufacturing operation" means the manufacturing of 18
articles, substances, or commodities for sale as tangible personal 19
property. A manufacturing operation begins at the point where the raw 20
materials enter the manufacturing site and ends at the point where 21
the processed material leaves the manufacturing site. With respect to 22
the production of class A or exceptional quality biosolids by a 23
wastewater treatment facility, the manufacturing operation begins at 24
the point where class B biosolids undergo additional processing to 25
achieve class A or exceptional quality standards. Notwithstanding 26
anything to the contrary in this section, the term also includes that 27
portion of a cogeneration project that is used to generate power for 28
consumption within the manufacturing site of which the cogeneration 29
project is an integral part. The term does not include the 30
preparation of food products on the premises of a person selling food 31
products at retail. 32
(g) "Cogeneration" means the simultaneous generation of 33
electrical energy and low-grade heat from the same fuel.34
(h) "Research and development operation" means engaging in 35
research and development as defined in RCW 82.63.010 by a 36
manufacturer or processor for hire. 37
(i) "Testing" means activities performed to establish or 38
determine the properties, qualities, and limitations of tangible 39
personal property. 40
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(j) "Testing operation" means the testing of tangible personal 1
property for a manufacturer or processor for hire. A testing 2
operation begins at the point where the tangible personal property 3
enters the testing site and ends at the point where the tangible 4
personal property leaves the testing site. The term also includes the 5
testing of tangible personal property for use in that portion of a 6
cogeneration project that is used to generate power for consumption 7
within the manufacturing site of which the cogeneration project is an 8
integral part. The term does not include the testing of tangible 9
personal property for use in the production of electricity by a light 10
and power business as defined in RCW 82.16.010 or the preparation of 11
food products on the premises of a person selling food products at 12
retail. 13
(3) This section does not apply (a) to sales of machinery and 14
equipment used directly in the manufacturing, research and 15
development, or testing of cannabis, useable cannabis, or cannabis-16
infused products, or (b) to sales of or charges made for labor and 17
services rendered in respect to installing, repairing, cleaning, 18
altering, or improving such machinery and equipment.19
(4) The exemptions in this section do not apply to an ineligible 20
person. For purposes of this subsection, the following definitions 21
apply: 22
(a) "Affiliated group" means a group of two or more entities that 23
are either: 24
(i) Affiliated as defined in RCW 82.32.655; or25
(ii) Permitted to file a consolidated return for federal income 26
tax purposes. 27
(b) "Ineligible person" means all members of an affiliated group 28
if all of the following apply: 29
(i) At least one member of the affiliated group was registered 30
with the department to do business in Washington state on or before 31
July 1, 1981; 32
(ii) As of August 1, 2015, the combined employment in this state 33
of the affiliated group exceeds forty thousand full-time and part-34
time employees, based on data reported to the employment security 35
department by the affiliated group; and 36
(iii) The business activities of the affiliated group primarily 37
include development, sales, and licensing of computer software and 38
services. 39
p. 5 HB 2723
Sec. 3. RCW 82.12.02565 and 2022 c 16 s 156 are each amended to 1
read as follows: 2
(1) The provisions of this chapter do not apply in respect to the 3
use by a manufacturer or processor for hire of machinery and 4
equipment used directly in a manufacturing operation or research and 5
development operation, to the use by a person engaged in testing for 6
a manufacturer or processor for hire of machinery and equipment used 7
directly in a testing operation, or to the use of labor and services 8
rendered in respect to installing, repairing, cleaning, altering, or 9
improving the machinery and equipment. 10
(2) The definitions, conditions, and requirements in RCW 11
82.08.02565 apply to this section. 12
(3) ((This)) Until July 1, 2027, this section does not apply to 13
the use of (a) machinery and equipment used directly in the 14
manufacturing, research and development, or testing of cannabis, 15
useable cannabis, or cannabis-infused products, or (b) labor and 16
services rendered in respect to installing, repairing, cleaning, 17
altering, or improving such machinery and equipment.18
(4) The exemptions in this section do not apply to an ineligible 19
person as defined in RCW 82.08.02565. 20
Sec. 4. RCW 82.12.022 and 2017 3rd sp.s. c 37 s 707 are each 21
amended to read as follows: 22
(1) A use tax is levied on every person in this state for the 23
privilege of using natural gas or manufactured gas, including 24
compressed natural gas and liquefied natural gas, within this state 25
as a consumer. 26
(2) The tax must be levied and collected in an amount equal to 27
the value of the article used by the taxpayer multiplied by the rate 28
in effect for the public utility tax on gas distribution businesses 29
under RCW 82.16.020. The "value of the article used" does not include 30
any amounts that are paid for the hire or use of a gas distribution 31
business as defined in RCW 82.16.010(2) in transporting the gas 32
subject to tax under this subsection if those amounts are subject to 33
tax under that chapter. 34
(3) The tax levied in this section does not apply to the use of 35
natural or manufactured gas delivered to the consumer by other means 36
than through a pipeline. 37
(4) The tax levied in this section does not apply to the use of 38
natural or manufactured gas if the person who sold the gas to the 39
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consumer has paid a tax under RCW 82.16.020 with respect to the gas 1
for which exemption is sought under this subsection.2
(5)(a) The tax levied in this section does not apply to the use 3
of natural or manufactured gas by an aluminum smelter as that term is 4
defined in RCW 82.04.217 before January 1, 2027. 5
(b) A person claiming the exemption provided in this subsection 6
(5) must file a complete annual tax performance report with the 7
department under RCW 82.32.534. 8
(6) ((The)) Until July 1, 2027, the tax imposed by this section 9
does not apply to the use of natural gas, compressed natural gas, or 10
liquefied natural gas, if the consumer uses the gas for 11
transportation fuel as defined in RCW 82.16.310. 12
(7) The tax levied in this section does not apply to the use of 13
natural or manufactured gas by a silicon smelter as that term is 14
defined in RCW 82.16.315. 15
(8) There is a credit against the tax levied under this section 16
in an amount equal to any tax paid by: 17
(a) The person who sold the gas to the consumer when that tax is 18
a gross receipts tax similar to that imposed pursuant to RCW 19
82.16.020 by another state with respect to the gas for which a credit 20
is sought under this subsection; or 21
(b) The person consuming the gas upon which a use tax similar to 22
the tax imposed by this section was paid to another state with 23
respect to the gas for which a credit is sought under this 24
subsection. 25
(9) The use tax imposed in this section must be paid by the 26
consumer to the department. 27
(10) There is imposed a reporting requirement on the person who 28
delivered the gas to the consumer to make a quarterly report to the 29
department. Such report must contain the volume of gas delivered, 30
name of the consumer to whom delivered, and such other information as 31
the department may require by rule. 32
(11) The department may adopt rules under chapter 34.05 RCW for 33
the administration and enforcement of sections 1 through 6, chapter 34
384, Laws of 1989. 35
Sec. 5. RCW 82.12.022 and 2017 c 135 s 27 are each amended to 36
read as follows: 37
(1) A use tax is levied on every person in this state for the 38
privilege of using natural gas or manufactured gas, including 39
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compressed natural gas and liquefied natural gas, within this state 1
as a consumer. 2
(2) The tax must be levied and collected in an amount equal to 3
the value of the article used by the taxpayer multiplied by the rate 4
in effect for the public utility tax on gas distribution businesses 5
under RCW 82.16.020. The "value of the article used" does not include 6
any amounts that are paid for the hire or use of a gas distribution 7
business as defined in RCW 82.16.010(2) in transporting the gas 8
subject to tax under this subsection if those amounts are subject to 9
tax under that chapter. 10
(3) The tax levied in this section does not apply to the use of 11
natural or manufactured gas delivered to the consumer by other means 12
than through a pipeline. 13
(4) The tax levied in this section does not apply to the use of 14
natural or manufactured gas if the person who sold the gas to the 15
consumer has paid a tax under RCW 82.16.020 with respect to the gas 16
for which exemption is sought under this subsection.17
(5)(a) The tax levied in this section does not apply to the use 18
of natural or manufactured gas by an aluminum smelter as that term is 19
defined in RCW 82.04.217 before January 1, 2027. 20
(b) A person claiming the exemption provided in this subsection 21
(5) must file a complete annual tax performance report with the 22
department under RCW 82.32.534. 23
(6) ((The)) Until July 1, 2027, the tax imposed by this section 24
does not apply to the use of natural gas, compressed natural gas, or 25
liquefied natural gas, if the consumer uses the gas for 26
transportation fuel as defined in RCW 82.16.310. 27
(7) There is a credit against the tax levied under this section 28
in an amount equal to any tax paid by: 29
(a) The person who sold the gas to the consumer when that tax is 30
a gross receipts tax similar to that imposed pursuant to RCW 31
82.16.020 by another state with respect to the gas for which a credit 32
is sought under this subsection; or 33
(b) The person consuming the gas upon which a use tax similar to 34
the tax imposed by this section was paid to another state with 35
respect to the gas for which a credit is sought under this 36
subsection. 37
(8) The use tax imposed in this section must be paid by the 38
consumer to the department. 39
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(9) There is imposed a reporting requirement on the person who 1
delivered the gas to the consumer to make a quarterly report to the 2
department. Such report must contain the volume of gas delivered, 3
name of the consumer to whom delivered, and such other information as 4
the department may require by rule. 5
(10) The department may adopt rules under chapter 34.05 RCW for 6
the administration and enforcement of sections 1 through 6, chapter 7
384, Laws of 1989. 8
Sec. 6. RCW 82.14.230 and 2014 c 216 s 305 are each amended to 9
read as follows: 10
(1) The governing body of any city, while not required by 11
legislative mandate to do so, may, by resolution or ordinance for the 12
purposes authorized by this chapter, fix and impose on every person a 13
use tax for the privilege of using natural gas or manufactured gas in 14
the city as a consumer. 15
(2) The tax is imposed in an amount equal to the value of the 16
article used by the taxpayer multiplied by the rate in effect for the 17
tax on natural gas businesses under RCW 35.21.870 in the city in 18
which the article is used. The "value of the article used," does not 19
include any amounts that are paid for the hire or use of a natural 20
gas business in transporting the gas subject to tax under this 21
subsection if those amounts are subject to tax under RCW 35.21.870.22
(3) The tax imposed under this section does not apply to the use 23
of natural or manufactured gas if the person who sold the gas to the 24
consumer has paid a tax under RCW 35.21.870 with respect to the gas 25
for which exemption is sought under this subsection.26
(4) There is a credit against the tax levied under this section 27
in an amount equal to any tax paid by: 28
(a) The person who sold the gas to the consumer when that tax is 29
a gross receipts tax similar to that imposed pursuant to RCW 30
35.21.870 by another municipality or other unit of local government 31
with respect to the gas for which a credit is sought under this 32
subsection; or 33
(b) The person consuming the gas upon which a use tax similar to 34
the tax imposed by this section was paid to another municipality or 35
other unit of local government with respect to the gas for which a 36
credit is sought under this subsection. 37
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(5) The use tax imposed must be paid by the consumer. The 1
administration and collection of the tax imposed is pursuant to RCW 2
82.14.050. 3
(6) ((The)) Until July 1, 2027, the tax authorized by this 4
section does not apply to the use of natural gas, compressed natural 5
gas, or liquefied natural gas, if the consumer uses the gas for 6
transportation fuel as defined in RCW 82.16.310. 7
Sec. 7. RCW 82.16.310 and 2019 c 202 s 1 are each amended to 8
read as follows: 9
(1) The provisions of this chapter do not apply to sales by a gas 10
distribution business of: 11
(a) ((Compressed)) Until July 1, 2027, compressed natural gas or 12
liquefied natural gas, where the compressed natural gas or liquefied 13
natural gas is to be sold or used as transportation fuel;14
(b) ((Natural)) Until July 1, 2027, natural gas from which the 15
buyer manufactures compressed natural gas or liquefied natural gas, 16
where the compressed natural gas or liquefied natural gas is to be 17
sold or used as transportation fuel; or 18
(c) Renewable natural gas. 19
(2) The exemption is available only when the buyer provides the 20
seller with an exemption certificate in a form and manner prescribed 21
by the department. The seller must retain a copy of the certificate 22
for the seller's files. 23
(3) For the purposes of this section, "transportation fuel" means 24
fuel for the generation of power to propel a motor vehicle as defined 25
in RCW 46.04.320, a vessel as defined in RCW 88.02.310, or a 26
locomotive or railroad car. 27
(4) For the purpose of this section, "renewable natural gas" has 28
the same meaning as provided in RCW 54.04.190. 29
Sec. 8. 2017 3rd sp.s. c 37 s 1407 (uncodified) is amended to 30
read as follows: 31
(1)(a) Except as provided in (b) of this subsection, part VII of 32
((this act )) chapter 37, Laws of 2017 3rd sp. sess. and section 4, 33
Laws of 2026 (section 4 of this act) expire((s)) July 1, 2027.34
(b)(i) If a person must make repayment under section 708 of this 35
act, part VII of ((this act)) chapter 37, Laws of 2017 3rd sp. sess. 36
and section 4, Laws of 2026 (section 4 of this act) expire((s)) 37
January 1, 2024. 38
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(ii) Section 706 of this act expires January 1, 2018.1
(2) If the contingent expiration date in subsection (1)(b) of 2
this section occurs, the department of revenue must provide written 3
notice of the expiration date of part VII of this act to affected 4
parties, the chief clerk of the house of representatives, the 5
secretary of the senate, the office of the code reviser, and others 6
as deemed appropriate by the department. 7
(3) If the contingent expiration date in subsection (1)(b) of 8
this section occurs, the joint legislative audit and review committee 9
is not required to perform the evaluation required in section 701 of 10
this act. 11
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