BILL REQ. #:  H-0138.4 

Prefiled 1/7/2003. Read first time 01/13/2003.   Referred to Committee on Technology, Telecommunications & Energy.

     AN ACT Relating to technology product development incentives; amending RCW 82.63.005, 82.04.4452, 82.63.020, and 82.63.030; adding new sections to chapter 43.131 RCW; providing an effective date; and declaring an emergency.

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

Sec. 1   RCW 82.63.005 and 1994 sp.s. c 5 s 1 are each amended to read as follows:
     The legislature finds that high-wage, high-skilled jobs are vital to the economic health of the state's citizens, and that targeted tax incentives will encourage the formation of high-wage, high-skilled jobs. The legislature also finds that tax incentives should be subject to the same rigorous requirements for efficiency and accountability as are other expenditure programs, and that tax incentives should therefore be focused to provide the greatest possible return on the state's investment.
     The legislature also finds that high-technology businesses are a vital and growing source of high-wage, high-skilled jobs in this state, and that the high-technology sector is a key component of the state's effort to encourage economic diversification. However, the legislature finds that many high-technology businesses incur significant costs associated with research and development and pilot scale manufacturing many years before a marketable product can be produced, and that current state tax policy discourages the growth of these companies by taxing them long before they become profitable.
     The legislature further finds that stimulating growth of high-technology businesses early in their development cycle, when they are turning ideas into marketable products, will build upon the state's established high-technology base, creating additional research and development jobs and subsequent manufacturing facilities.
     The legislature further finds that the development of the products of research and development in the manufacturing phase are vital to economic growth and well-being of the state.
     For these reasons, the legislature hereby establishes a technology product development program of business and occupation tax credits for qualified ((research and)) product development expenditures. The legislature also hereby establishes a technology product development tax deferral program for high-technology ((research and)) product development ((and pilot scale manufacturing facilities)). The legislature declares that these limited programs serve the vital public purpose of creating employment opportunities in this state. The legislature further declares its intent to create a contract within the meaning of Article I, section 23 of the state Constitution as to those businesses that make capital investments in consideration of the tax deferral program established in this chapter.

Sec. 2   RCW 82.04.4452 and 2000 c 103 s 7 are each amended to read as follows:
     (1) In computing the tax imposed under this chapter, a credit is allowed for ((each person whose)) certain technological product development. To receive the credit, the following criteria apply:
     (a) For the person claiming the credit, the research and development spending during the year in which the credit is claimed ((exceeds)) must exceed 0.92 percent of the person's taxable amount during the same calendar year; and
     (b) The product development that is associated with qualified research and development expenditures must occur within this state, except for field testing that is mandated by the federal government. A proposal for product development must be included in the application process, as provided in subsection (6) of this section.
     (2) The credit is equal to the greater of the amount of qualified research and development expenditures of a person or eighty percent of amounts received by a person other than a public educational or research institution in compensation for the conduct of qualified research and development, multiplied by the rate provided in RCW 82.04.260(3) in the case of a nonprofit corporation or nonprofit association engaging within this state in research and development, and the rate provided in RCW 82.04.290(2) for every other person.
     (3) Any person entitled to the credit provided in subsection (2) of this section as a result of qualified research and development conducted under contract may assign all or any portion of the credit to the person contracting for the performance of the qualified research and development.
     (4) The credit, including any credit assigned to a person under subsection (3) of this section, shall be taken against taxes due for the same calendar year in which the qualified research and development expenditures are incurred. The credit, including any credit assigned to a person under subsection (3) of this section, for each calendar year shall not exceed the lesser of two million dollars or the amount of tax otherwise due under this chapter for the calendar year.
     (5) Any person taking the credit, including any credit assigned to a person under subsection (3) of this section, whose research and development spending during the calendar year in which the credit is claimed fails to exceed 0.92 percent of the person's taxable amount during the same calendar year shall be liable for payment of the additional taxes represented by the amount of credit taken together with interest, but not penalties. Interest shall be due at the rate provided for delinquent excise taxes retroactively to the date the credit was taken until the taxes are paid. Any credit assigned to a person under subsection (3) of this section that is disallowed as a result of this section may be taken by the person who performed the qualified research and development subject to the limitations set forth in subsection (4) of this section.
     (6) Any person claiming the credit, and any person assigning a credit as provided in subsection (3) of this section, shall file:
     (a) An affidavit form prescribed by the department which shall include the amount of the credit claimed, an estimate of the anticipated qualified research and development expenditures during the calendar year for which the credit is claimed, an estimate of the taxable amount during the calendar year for which the credit is claimed, and such additional information as the department may prescribe; and
     (b) A proposal that describes the technological development of the product or products anticipated to be ultimately marketed. The proposal shall include a description of each phase of the product development.
     (i) The phases to be described in the proposal include, but are not limited to, the following activities: Research and development, including specification, design, engineering, prototype development, and field testing; and manufacturing, including verification, production, product finishing, and packaging.
     (ii) The proposal documentation for each phase shall include:
     (A) A description of anticipated product or products from the activity;
     (B) The expected sales or value of the anticipated activity;
     (C) The expected activity duration;
     (D) The activity location;
     (E) The average employment for the prior year, if any, associated with the activity at the location of the activity and for the firm as a whole;
     (F) The estimated or actual new employment associated with the activity at the location of the activity and for the firm as a whole; and
     (G) An estimate of employment associated with the activity that would have occurred at the firm as a whole, but for the utilization of the credit under this section.
     (7) A person claiming the credit shall agree to supply the department with information necessary to measure the results of the technology product development tax credit program ((for qualified research and development expenditures)).
     (8) The department shall use the information required under subsection (7) of this section to perform three assessments on the tax credit program authorized under this section. The assessments will take place in 1997, 2000, ((and)) 2003, and 2008. The department shall prepare reports on each assessment and deliver their reports by September 1, 1997, September 1, 2000, ((and)) September 1, 2003, and September 1, 2008. The assessments shall measure the effect of the program on job creation, the number of jobs created for Washington residents, company growth, the introduction of new products, the diversification of the state's economy, growth in research and development investment, the movement of firms or the consolidation of firms' operations into the state, and such other factors as the department selects.
     (9) For the purpose of this section:
     (a) "Qualified research and development expenditures" means operating expenses, including wages, compensation of a proprietor or a partner in a partnership as determined under rules adopted by the department, benefits, supplies, and computer expenses, directly incurred in qualified research and development by a person claiming the credit provided in this section. The term does not include amounts paid to a person other than a public educational or research institution to conduct qualified research and development. Nor does the term include capital costs and overhead, such as expenses for land, structures, or depreciable property.
     (b) "Qualified research and development" shall have the same meaning as in RCW 82.63.010.
     (c) "Research and development spending" means qualified research and development expenditures plus eighty percent of amounts paid to a person other than a public educational or research institution to conduct qualified research and development.
     (d) "Taxable amount" means the taxable amount subject to the tax imposed in this chapter required to be reported on the person's combined excise tax returns during the year in which the credit is claimed, less any taxable amount for which a credit is allowed under RCW 82.04.440.
     (((10) This section expires December 31, 2004.))

Sec. 3   RCW 82.63.020 and 1994 sp.s. c 5 s 4 are each amended to read as follows:
     (1) Application for deferral of taxes under this chapter must be made before initiation of construction of, or acquisition of equipment or machinery for the investment project. The application shall be made to the department in a form and manner prescribed by the department, which shall rule on the application within sixty days. The application shall contain the following:
     (a) Information regarding the location of the investment project, the applicant's average employment in the state for the prior year, estimated or actual new employment related to the project, estimated or actual wages of employees related to the project, estimated or actual costs, time schedules for completion and operation, and other information required by the department((. The department shall rule on the application within sixty days)); and
     (b) A proposal that describes the technological development of the product or products anticipated to be ultimately marketed. The proposal shall include a description of each phase of the product development.
     (i) The phases to be described in the proposal include, but are not limited to, the following activities: Research and development, including specification, design, engineering, prototype development, and field testing; and manufacturing, including verification, production, product finishing, and packaging.
     (ii) The proposal documentation for each phase shall include:
     (A) A description of anticipated product or products from the activity;
     (B) The expected sales or value of the anticipated activity;
     (C) The expected activity duration;
     (D) The activity location;
     (E) The average employment for the prior year, if any, associated with the activity at the location of the activity and for the firm as a whole;
     (F) The estimated or actual new employment associated with the activity at the location of the activity and for the firm as a whole; and
     (G) An estimate of employment associated with the activity that would have occurred at the firm as a whole, but for the utilization of the credit under this section.
     (2) Applicants for deferral of taxes under this chapter shall agree to supply the department with nonproprietary information necessary to measure the results of the tax deferral program for ((high-technology research and)) technology product development ((and pilot scale manufacturing)) facilities. The department shall use the information to perform three assessments on the tax deferral program authorized under this chapter. The assessments will take place in 1997, 2000, ((and)) 2003, and 2008. The department shall prepare reports on each assessment and deliver their reports by September 1, 1997, September 1, 2000, ((and)) September 1, 2003, and September 1, 2008. The assessments shall measure the effect of the program on job creation, the number of jobs created for Washington residents, company growth, the introduction of new products, the diversification of the state's economy, growth in research and development investment, the movement of firms or the consolidation of firms' operations into the state, and such other factors as the department selects.

Sec. 4   RCW 82.63.030 and 1994 sp.s. c 5 s 5 are each amended to read as follows:
     (1) Except as provided in subsection (2) of this section, the department shall issue a sales and use tax deferral certificate for state and local sales and use taxes due under chapters 82.08, 82.12, and 82.14 RCW on each eligible investment project that has a complete proposal for product development under RCW 82.63.020.
     (2) No certificate may be issued for an investment project that has already received a deferral under chapter 82.60 or 82.61 RCW or this chapter, except that an investment project for qualified research and development that has already received a deferral may also receive an additional deferral certificate for adapting the investment project for use in pilot scale manufacturing.
     (((3) This section shall expire July 1, 2004.))

NEW SECTION.  Sec. 5   A new section is added to chapter 43.131 RCW to read as follows:
     The technology product development credit and deferral created by this act shall be reviewed under this chapter before July 1, 2013. The department of revenue shall provide the information necessary for the joint legislative audit and review committee to provide the required review.

NEW SECTION.  Sec. 6   A new section is added to chapter 43.131 RCW to read as follows:
     The following acts or parts of acts are each repealed, effective July 1, 2014:
     (1) RCW 82.04.4452 (Credit -- Research and development spending--Assessment report) and 2003 c . . . s 2 (section 2 of this act), 2000 c 103 s 7, 1997 c 7 s 4, & 1994 sp.s. c 5 s 2;
     (2) RCW 82.63.005 (Findings -- Intent to create a contract) and 2003 c . . . s 1 (section 1 of this act) & 1994 sp.s. c 5 s 1;
     (3) RCW 82.63.010 (Definitions) and 1995 1st sp.s. c 3 s 12 & 1994 sp.s. c 5 s 3;
     (4) RCW 82.63.020 (Application -- Assessment reports) and 2003 c . . . s 3 (section 3 of this act) & 1994 sp.s. c 5 s 4;
     (5) RCW 82.63.030 (Sales and use tax deferral certificate -- Eligible investment projects and pilot scale manufacturing) and 2003 c . . . s 4 (section 4 of this act) & 1994 sp.s. c 5 s 5;
     (6) RCW 82.63.045 (Repayment not required -- Repayment schedule for unqualified investment project -- Exceptions) and 2000 c 106 s 10 & 1995 1st sp.s. c 3 s 13;
     (7) RCW 82.63.060 (Administration) and 1994 sp.s. c 5 s 8;
     (8) RCW 82.63.070 (Public disclosure) and 1994 sp.s. c 5 s 9; and
     (9) RCW 82.63.900 (Effective date -- 1994 sp.s. c 5) and 1994 sp.s. c 5 s 12.

NEW SECTION.  Sec. 7   This act is necessary for the immediate preservation of the public peace, health, or safety, or support of the state government and its existing public institutions, and takes effect July 1, 2003.