Senate Bill Report — ESHB 2482

Summary

A Washington Senate Bill Report on ESHB 2482, an act relating to reinstating semiconductor tax incentives, prepared for the Senate Committee on Business, Financial Services, Gaming & Trade as of February 14, 2024. The report states that the bill passed the House on 2/12/24 by a vote of 96-0 and was sponsored by the House Committee on Finance. Its background section describes the retail sales and use tax, the business and occupation tax, and eight tax preferences for semiconductor materials manufacturing, six of which expired on January 1, 2024. The bill summary states that those six preferences are reinstated, contingent on a new fabrication facility built by January 1, 2034 with new investments of at least $500 million. It also describes a reimbursement requirement tied to employment levels and an extension of the two other preferences to January 1, 2034.

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                            SENATE BILL REPORT
                                 ESHB 2482

                                     As of February 14, 2024

Title: An act relating to reinstating semiconductor tax incentives.

Brief Description: Reinstating semiconductor tax incentives.

Sponsors: House Committee on Finance (originally sponsored by Representatives Harris,
    Santos and Stonier).

Brief History: Passed House: 2/12/24, 96-0.
     Committee Activity:


                                     Brief Summary of Bill
           • Reinstates six expired tax incentives for semiconductor manufacturing
             through 2034, conditional on new investments.
           • Extends the expiration for two existing tax incentives for semiconductor
             manufacturing through 2034.


SENATE COMMITTEE ON BUSINESS, FINANCIAL SERVICES, GAMING & TRADE

     Staff: Tianyi Lan (786-7432)

     Background: Retail Sales and Use Tax and Business and Occupation Tax. Retail sales
     taxes are imposed on retail sales of most articles of tangible personal property, digital
     products, and some services. A retail sale is a sale to the final consumer or end user of the
     property, digital product, or service. If retail sales taxes were not collected when the user
     acquired the property, digital products, or services, then use tax applies to the value of
     property, digital product, or service when used in this state. Both the state and local
     governments impose sales and use taxes. The state sales and use tax rate is 6.5 percent; local
     sales and use tax rates vary from 0.5 percent to 3.9 percent, depending on the location.
     Unless specifically exempt, all transactions or uses of property or services in the tax base




     This analysis was prepared by non-partisan legislative staff for the use of legislative
     members in their deliberations. This analysis is not part of the legislation nor does it
     constitute a statement of legislative intent.

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     are subject to retail sales and use taxes.

     The state business and occupation (B&O) tax is Washington's primary business tax. It is a
     gross receipts tax measured on the value of products, gross proceeds of sale, or gross
     income of the business. There are no deductions from the B&O tax for labor, materials,
     taxes, or other costs of doing business. A business may have more than one B&O tax rate,
     depending on the types of activities conducted. For example, the rate for most persons that
     conduct manufacturing or processing for hire activities is 0.484 percent. The state B&O tax
     includes a number of preferential tax rates, credits, exemptions, and deductions as well as
     several increased rates or surcharges.

     Tax Preferences. State law provides for a range of tax preferences that confer reduced tax
     liability upon a designated class of taxpayer. Tax preferences include tax exclusions,
     deductions, exemptions, preferential tax rates, deferrals, and credits. Washington has over
     700 tax preferences, including a variety of sales and use tax exemptions. Legislation that
     establishes or expands a tax preference must include a tax preference performance statement
     that identifies the public policy objective of the preference, as well as specific metrics the
     Joint Legislative Audit and Review Committee can use to evaluate the effectiveness of the
     preference. All new tax preferences automatically expire after ten years unless an
     alternative expiration date is provided.

     Tax Incentives for Semiconductor Industry. Semiconductor manufacturing is the process of
     creating integrated circuits or microchips. Semiconductor materials are essential for the
     construction of electronic devices and the semiconductor industry. There are eight tax
     preferences related to the semiconductor materials manufacturing industry. Those tax
     preferences are provided for manufacturers of semiconductor materials and businesses that
     perform manufacturing services on semiconductor materials owned by others, known as
     processors for hire. Six tax preferences were contingent on a manufacturer making at least a
     $1 billion investment in new buildings, machinery and equipment to site and operate a
     semiconductor microchip fabrication facility. Those preferences expired on January 1,
     2024, because the contingent investment never occurred. The six preferences were:
         • a sales and use tax exemption for labor, services, and sales of tangible personal
            property related to the construction of new buildings used for manufacturing
            semiconductor materials;
         • a property tax exemption for machinery and equipment used in manufacturing
            semiconductor materials at a building exempt from sales and use tax;
         • a $3,000 B&O tax job credit for each manufacturing production position that takes
            place in a new building exempt from sales and use tax;
         • a preferential B&O tax rate of 0.275 percent for businesses of manufacturing
            semiconductor materials;
         • a sales and use tax exemption for the sale of gases and chemicals used by a
            manufacturer in the manufacturing of semiconductor materials; and
         • a B&O tax exemption for manufacturers of semiconductor microchips.



Senate Bill Report                                -2-                                   ESHB 2482
     The sales and use tax exemption for labor, services, and sales of tangible personal property
     related to the construction of new buildings used for manufacturing semiconductor
     materials has an employment requirement that manufacturer or processor for hire must
     maintain at least 75 percent of full employment at the new building. There were no
     employment requirement for other five tax preferences.

     There are two tax preferences related to the semiconductor industry currently in effect:
        • a preferential B&O rate of 0.275 percent for manufacturing semiconductor materials;
           and
        • a sales and use tax exemption for purchases of gases and chemicals used in specific
           phases of the semiconductor production process.

     These two tax preferences require beneficiaries to maintain the number of persons
     employed at least 90 percent of the employment average for the previous three years, or to
     reimburse 50 percent of the benefits. Both preferences expire on December 1, 2028. For the
     reduced B&O tax rates, semiconductor materials are defined in statute as silicon crystals,
     silicon ingots, raw polished semiconductor wafers, and compound semiconductor wafers.
     For the sales and use tax exemptions currently in effect, the definition is expanded to
     include materials that are used in solar energy systems, including solar grade silicon, silicon
     solar wafers, compound semiconductor solar wafers, silicon solar cells, and thin film solar
     devices.

     Summary of Bill: The six tax preferences that expired on January 1, 2024, are reinstated,
     contingent on the construction of a new semiconductor manufacturing fabrication built by
     January 1, 2034, with new investments of at least $500 million. The reinstated tax
     preferences expire January 1, 2034, and are exempt from the tax preference performance
     statement requirements.

     The bill sets an employment requirement for four out of the six tax preferences. Any tax
     preference recipient must reimburse the Department of Revenue for 50 percent of the
     amount of the tax preference claimed if the number of persons employed by the preference
     beneficiary is less than 90 percent of the beneficiary's three-year employment average for
     the three years immediately preceding the year in which the preference is claimed.

     The expiration date is extended to January 1, 2034, for the two other preferences currently
     in effect for semiconductor manufacturing.

     Appropriation: None.

     Fiscal Note: Available.

     Creates Committee/Commission/Task Force that includes Legislative members: No.

     Effective Date: The bill contains an emergency clause and takes effect immediately.


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