BILL REQ. #:  H-1172.3 

Read first time 02/09/2005.   Referred to Committee on Finance.

     AN ACT Relating to high-technology excise tax incentives for pharmaceutical manufacturing companies; amending RCW 82.04.4452, 82.63.010, 82.63.020, 82.63.030, and 82.63.045; and declaring an emergency.

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

Sec. 1   RCW 82.04.4452 and 2004 c 2 s 2 are each amended to read as follows:
     (1) In computing the tax imposed under this chapter, a credit is allowed for each person whose research and development spending during the year in which the credit is claimed exceeds 0.92 percent of the person's taxable amount during the same calendar year.
     (2) The credit shall be calculated as follows: (a) Determine 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; (b) subtract 0.92 percent of the person's taxable amount from the amount determined under (a) of this subsection; (c) multiply the amount determined under (b) of this subsection 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 person's average tax rate 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) A pharmaceutical manufacturing company shall not claim credit under this section if: (a) The company has reduced sales to retail pharmacies in Canada within the twelve months prior to the effective date of this act or at any time after the effective date of this act, pursuant to a company policy issued in response to the direct and indirect sales of company products to residents of the United States by retail pharmacies in Canada; or (b) the average retail price of the company's products in the United States exceeds the average retail price of the company's products in Canada by at least ten percent, for the twelve months prior to the effective date of this act or for any three-month period after the effective date of this act. A pharmaceutical manufacturing company shall submit an affidavit, as part of the annual survey under subsection (8) of this section, stating that the company is not disqualified from the credit under this subsection.
     (7) Any person claiming the credit, and any person assigning a credit as provided in subsection (3) of this section, shall file an annual report in a form prescribed by the department which shall include the amount of the credit claimed, the qualified research and development expenditures during the calendar year for which the credit is claimed, and the taxable amount during the calendar year for which the credit is claimed, and such additional information as the department may prescribe. The report is due by March 31st following any year a credit is taken.
     (((7))) (8)(a) The legislature finds that accountability and effectiveness are important aspects of setting tax policy. In order to make policy choices regarding the best use of limited state resources the legislature needs information on how a tax incentive is used.
     (b) A person claiming the credit shall agree to complete an annual survey. The annual survey is in addition to the annual report due under subsection (((6))) (7) of this section. The survey is due by March 31st following any year in which a credit is taken. The survey shall include the amount of the tax credit taken, the number of new products or research projects by general classification, and the number of trademarks, patents, and copyrights associated with the research and development activities for which a credit was taken. The survey shall also include the following information for employment positions in Washington:
     (i) The number of total employment positions;
     (ii) Full-time, part-time, and temporary employment positions as a percent of total employment;
     (iii) The number of employment positions according to the following wage bands: Less than thirty thousand dollars; thirty thousand dollars or greater, but less than sixty thousand dollars; and sixty thousand dollars or greater. A wage band containing fewer than three individuals may be combined with another wage band; and
     (iv) The number of employment positions that have employer-provided medical, dental, and retirement benefits, by each of the wage bands.
     (c) The department may request additional information necessary to measure the results of the tax credit program, to be submitted at the same time as the survey.
     (d) All information collected under this subsection, except the amount of the tax credit taken, is deemed taxpayer information under RCW 82.32.330 and is not disclosable. Information on the amount of tax credit taken is not subject to the confidentiality provisions of RCW 82.32.330 and may be disclosed to the public upon request except that persons taking less than ten thousand dollars of credit during the period covered by the survey may request the department to treat the
tax credit amount as confidential under RCW 82.32.330.
     (e) If a person fails to complete the survey required under this subsection by the due date, the person entitled to the credit provided in subsection (2) of this section is not eligible to take or assign the credit provided in subsection (2) of this section in the year the person failed to complete the survey.
     (((8))) (9) The department shall use the information from subsection (((7))) (8) of this section to prepare summary descriptive statistics by category. No fewer than three taxpayers shall be included in any category. The department shall report these statistics to the legislature each year by September 1st.
     (((9))) (10) The department shall use the information from subsection (((7))) (8) of this section to study the tax credit program authorized under this section. The department shall report to the legislature by December 1, 2009, and December 1, 2013. The reports 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.
     (((10))) (11) For the purpose of this section:
     (a) "Average tax rate" means a person's total tax under this chapter for the reporting period divided by the taxpayer's total taxable income under this chapter for the reporting period.
     (b) "Pharmaceutical manufacturing company" means an entity that is engaged in the production, preparation, propagation, compounding, conversion, or processing of prescription drugs, either directly or indirectly by extraction from substances of natural origin, or independently by means of chemical synthesis, or by a combination of extraction and chemical synthesis, or any entity engaged in the packaging, repackaging, labeling, relabeling, or distribution of prescription drugs. This term does not include pharmacists licensed under chapter 18.64 RCW, or pharmacy operations of any integrated delivery system undertaken for the benefit of patients obtaining care through that system.
     (c) "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.
     (((c))) (d) "Qualified research and development" shall have the same meaning as in RCW 82.63.010.
     (((d))) (e) "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.
     (((e))) (f) "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.
     (((11))) (12) This section expires January 1, 2015.

Sec. 2   RCW 82.63.010 and 2004 c 2 s 3 are each amended to read as follows:
     Unless the context clearly requires otherwise, the definitions in this section apply throughout this chapter.
     (1) "Advanced computing" means technologies used in the designing and developing of computing hardware and software, including innovations in designing the full spectrum of hardware from hand-held calculators to super computers, and peripheral equipment.
     (2) "Advanced materials" means materials with engineered properties created through the development of specialized processing and synthesis technology, including ceramics, high value-added metals, electronic materials, composites, polymers, and biomaterials.
     (3) "Applicant" means a person applying for a tax deferral under this chapter.
     (4) "Biotechnology" means the application of technologies, such as recombinant DNA techniques, biochemistry, molecular and cellular biology, genetics and genetic engineering, cell fusion techniques, and new bioprocesses, using living organisms, or parts of organisms, to produce or modify products, to improve plants or animals, to develop microorganisms for specific uses, to identify targets for small molecule pharmaceutical development, or to transform biological systems into useful processes and products or to develop microorganisms for specific uses.
     (5) "Department" means the department of revenue.
     (6) "Electronic device technology" means technologies involving microelectronics; semiconductors; electronic equipment and instrumentation; radio frequency, microwave, and millimeter electronics; optical and optic-electrical devices; and data and digital communications and imaging devices.
     (7) "Eligible investment project" means an investment project which either initiates a new operation, or expands or diversifies a current operation by expanding, renovating, or equipping an existing facility. The lessor or owner of the qualified building is not eligible for a deferral unless:
     (a) The underlying ownership of the buildings, machinery, and equipment vests exclusively in the same person; or
     (b)(i) The lessor by written contract agrees to pass the economic benefit of the deferral to the lessee;
     (ii) The lessee that receives the economic benefit of the deferral agrees in writing with the department to complete the annual survey required under RCW 82.63.020(2); and
     (iii) The economic benefit of the deferral passed to the lessee is no less than the amount of tax deferred by the lessor and is evidenced by written documentation of any type of payment, credit, or other financial arrangement between the lessor or owner of the qualified building and the lessee.
     (8) "Environmental technology" means assessment and prevention of threats or damage to human health or the environment, environmental cleanup, and the development of alternative energy sources.
     (9) "Investment project" means an investment in qualified buildings or qualified machinery and equipment, including labor and services rendered in the planning, installation, and construction or improvement of the project.
     (10) "Person" has the meaning given in RCW 82.04.030 and includes state universities as defined in RCW 28B.10.016.
     (11) "Pharmaceutical manufacturing company" has the same meaning as provided in RCW 82.04.4452.
     (12) "Pilot scale manufacturing" means design, construction, and testing of preproduction prototypes and models in the fields of biotechnology, advanced computing, electronic device technology, advanced materials, and environmental technology other than for commercial sale. As used in this subsection, "commercial sale" excludes sales of prototypes or sales for market testing if the total gross receipts from such sales of the product, service, or process do not exceed one million dollars.
     (((12))) (13) "Qualified buildings" means construction of new structures, and expansion or renovation of existing structures for the purpose of increasing floor space or production capacity used for pilot scale manufacturing or qualified research and development, including plant offices and other facilities that are an essential or an integral part of a structure used for pilot scale manufacturing or qualified research and development. If a building is used partly for pilot scale manufacturing or qualified research and development, and partly for other purposes, the applicable tax deferral shall be determined by apportionment of the costs of construction under rules adopted by the department.
     (((13))) (14) "Qualified machinery and equipment" means fixtures, equipment, and support facilities that are an integral and necessary part of a pilot scale manufacturing or qualified research and development operation. "Qualified machinery and equipment" includes: Computers; software; data processing equipment; laboratory equipment, instrumentation, and other devices used in a process of experimentation to develop a new or improved pilot model, plant process, product, formula, invention, or similar property; manufacturing components such as belts, pulleys, shafts, and moving parts; molds, tools, and dies; vats, tanks, and fermenters; operating structures; and all other equipment used to control, monitor, or operate the machinery. For purposes of this chapter, qualified machinery and equipment must be either new to the taxing jurisdiction of the state or new to the certificate holder, except that used machinery and equipment may be treated as qualified machinery and equipment if the certificate holder either brings the machinery and equipment into Washington or makes a retail purchase of the machinery and equipment in Washington or elsewhere.
     (((14))) (15) "Qualified research and development" means research and development performed within this state in the fields of advanced computing, advanced materials, biotechnology, electronic device technology, and environmental technology.
     (((15))) (16) "Recipient" means a person receiving a tax deferral under this chapter.
     (((16))) (17) "Research and development" means activities performed to discover technological information, and technical and nonroutine activities concerned with translating technological information into new or improved products, processes, techniques, formulas, inventions, or software. The term includes exploration of a new use for an existing drug, device, or biological product if the new use requires separate licensing by the federal food and drug administration under chapter 21, C.F.R., as amended. The term does not include adaptation or duplication of existing products where the products are not substantially improved by application of the technology, nor does the term include surveys and studies, social science and humanities research, market research or testing, quality control, sale promotion and service, computer software developed for internal use, and research in areas such as improved style, taste, and seasonal design.
     (((17))) (18)(a) "Initiation of construction" means the date that a building permit is issued under the building code adopted under RCW 19.27.031 for:
     (i) Construction of the qualified building, if the underlying ownership of the building vests exclusively with the person receiving the economic benefit of the deferral;
     (ii) Construction of the qualified building, if the economic benefits of the deferral are passed to a lessee as provided in subsection (7) of this section; or
     (iii) Tenant improvements for a qualified building, if the economic benefits of the deferral are passed to a lessee as provided in subsection (7) of this section.
     (b) "Initiation of construction" does not include soil testing, site clearing and grading, site preparation, or any other related activities that are initiated before the issuance of a building permit for the construction of the foundation of the building.
     (c) If the investment project is a phased project, "initiation of construction" shall apply separately to each phase.

Sec. 3   RCW 82.63.020 and 2004 c 2 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. The application shall contain 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 application shall also contain an affidavit, if the applicant is a pharmaceutical manufacturing company, stating that: (a) The applicant has not reduced sales to retail pharmacies in Canada within the twelve months prior to the effective date of this act, pursuant to a company policy issued in response to the direct and indirect sales of company products to residents of the United States by retail pharmacies in Canada; or (b) the average retail price of the applicant's products in the United States exceeds the average retail price of the applicant's products in Canada by at least ten percent, for the twelve months prior to the effective date of this act. The department shall rule on the application within sixty days.
     (2)(a) The legislature finds that accountability and effectiveness are important aspects of setting tax policy. In order to make policy choices regarding the best use of limited state resources the legislature needs information on how a tax incentive is used.
     (b) Applicants for deferral of taxes under this chapter shall agree to complete an annual survey. If the economic benefits of the deferral are passed to a lessee as provided in RCW 82.63.010(7), the lessee shall agree to complete the annual survey and the applicant is not required to complete the annual survey. The survey is due by March 31st of the year following the calendar year in which the investment project is certified by the department as having been operationally complete and the seven succeeding calendar years. The survey shall include the amount of tax deferred, the number of new products or research projects by general classification, and the number of trademarks, patents, and copyrights associated with activities at the investment project. The survey shall also include the following information for employment positions in Washington:
     (i) The number of total employment positions;
     (ii) Full-time, part-time, and temporary employment positions as a percent of total employment;
     (iii) The number of employment positions according to the following wage bands: Less than thirty thousand dollars; thirty thousand dollars or greater, but less than sixty thousand dollars; and sixty thousand dollars or greater. A wage band containing fewer than three individuals may be combined with another wage band; and
     (iv) The number of employment positions that have employer-provided medical, dental, and retirement benefits, by each of the wage bands.
     (c) The department may request additional information necessary to measure the results of the deferral program, to be submitted at the same time as the survey.
     (d) All information collected under this subsection, except the amount of the tax deferral taken, is deemed taxpayer information under RCW 82.32.330 and is not disclosable. Information on the amount of tax deferral taken is not subject to the confidentiality provisions of RCW 82.32.330 and may be disclosed to the public upon request.
     (3) The department shall use the information from this section to prepare summary descriptive statistics by category. No fewer than three taxpayers shall be included in any category. The department shall report these statistics to the legislature each year by September 1st.
     (4) The department shall use the information to study the tax deferral program authorized under this chapter. The department shall report to the legislature by December 1, 2009, and December 1, 2013. The reports 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 2004 c 2 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.
     (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) No certificate shall be issued for an investment project if: (a) The applicant is a pharmaceutical manufacturing company that has reduced sales to retail pharmacies in Canada within the twelve months prior to the effective date of this act, pursuant to a company policy issued in response to the direct and indirect sales of company products to residents of the United States by retail pharmacies in Canada; or (b) the average retail price of the applicant's products in the United States exceeds the average retail price of the applicant's products in Canada by at least ten percent, for the twelve months prior to the effective date of this act.
     (4) This section shall expire January 1, 2015.

Sec. 5   RCW 82.63.045 and 2004 c 2 s 6 are each amended to read as follows:
     (1) Except as provided in subsection (2) of this section, taxes deferred under this chapter need not be repaid.
     (2)(a) If, on the basis of survey under RCW 82.63.020 or other information, the department finds that an investment project is used for purposes other than qualified research and development or pilot scale manufacturing at any time during the calendar year in which the investment project is certified by the department as having been operationally completed, or at any time during any of the seven succeeding calendar years, a portion of deferred taxes shall be immediately due according to the following schedule:

NEW SECTION.  Sec. 6   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 immediately.