BILL REQ. #:  S-4145.1 

Read first time 01/12/2006.   Referred to Committee on International Trade & Economic Development.

     AN ACT Relating to biotechnology product and medical device manufacturing tax incentives; amending RCW 82.04.440 and 82.32.600; adding a new section to chapter 82.32 RCW; adding new sections to chapter 82.04 RCW; adding a new chapter to Title 82 RCW; providing an effective date; and providing expiration dates.

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

NEW SECTION.  Sec. 1   The legislature finds that the state's economy is increasingly dependent on the expansion of knowledge-based sectors, including the life sciences. The legislature also finds that commercial enterprises in the life sciences create high-wage, high-skilled jobs that are part of the state's effort to encourage economic diversification and stability. However, the legislature also finds that commercial life sciences businesses, particularly in biotechnology product and medical device manufacturing, incur significant costs associated with capital infrastructure and job training often years before a product is licensed for marketing or a facility is licensed for manufacturing by governmental agencies in the United States and abroad. The legislature also finds that current state tax policy discourages the growth of these companies in two ways: (1) Washington state's higher rate of taxation compared with other states and nations encourages the export of intellectual property and commercial operations out of Washington; and (2) taxing these businesses before facilities, or products produced therein, are licensed for marketing by regulatory agencies.
     The legislature further finds that targeted tax incentives may encourage the formation, expansion, and retention of commercial operations within the life sciences sector. 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.
     For these reasons, the legislature hereby establishes a program of business and occupation tax credits for qualified biotechnology product and medical device commercial expenditures. The legislature also hereby establishes a tax deferral program for commercial manufacturing facilities in this sector. The legislature also hereby provides preferential tax rates for retailing, wholesaling, and manufacturing activities related to biotechnology products and medical devices. The legislature declares that these limited programs serve the vital public purposes of incenting expenditures in commercial life science operations and the development of 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.

NEW SECTION.  Sec. 2   Unless the context clearly requires otherwise, the definitions in this section apply throughout this chapter.
     (1) "Applicant" means a person applying for a tax deferral under this chapter.
     (2) "Biotechnology" means a technology based on the science of biology, microbiology, molecular biology, cellular biology, biochemistry, or biophysics, or any combination of these, and includes, but is not limited to, recombinant DNA techniques, genetics and genetic engineering, cell fusion techniques, and new bioprocesses, using living organisms, or parts of organisms.
     (3) "Biotechnology product" means any virus, therapeutic serum, antibody, protein, toxin, antitoxin, vaccine, blood, blood component or derivative, allergenic product, or analogous product produced through the application of biotechnology that is used in the prevention, treatment, or cure of diseases or injuries to humans.
     (4) "Department" means the department of revenue.
     (5)(a) "Eligible investment project" means an investment in qualified buildings or qualified machinery and equipment, including labor and services rendered in the planning, installation, and construction of the project.
     (b) The lessor or owner of a qualified building is not eligible for a deferral unless:
     (i) The underlying ownership of the buildings, machinery, and equipment vests exclusively in the same person; or
     (ii)(A) The lessor by written contract agrees to pass the economic benefit of the deferral to the lessee;
     (B) The lessee that receives the economic benefit of the deferral agrees in writing with the department to complete the annual survey required under section 8 of this act; and
     (C) 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.
     (6)(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 (5)(b)(ii)(A) 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 (5)(b)(ii)(A) 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.
     (7) "Manufacturing" has the meaning provided in RCW 82.04.120.
     (8) "Medical device" means an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including any component, part, or accessory, that is designed or developed and:
     (a) Recognized in the national formulary, or the United States pharmacopeia, or any supplement to them;
     (b) Intended for use in the diagnosis of disease, or in the cure, mitigation, treatment, or prevention of disease or other conditions in human beings or other animals; or
     (c) Intended to affect the structure or any function of the body of man or other animals, and which does not achieve any of its primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized for the achievement of any of its principal intended purposes.
     (9) "Person" has the meaning provided in RCW 82.04.030.
     (10) "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 biotechnology product manufacturing or medical device manufacturing activities, including plant offices, commercial laboratories for process development, quality assurance and quality control, and warehouses or other facilities for the storage of raw material or finished goods if the facilities are an essential or an integral part of a factory, plant, or laboratory used for biotechnology product manufacturing or medical device manufacturing. If a building is used partly for biotechnology product manufacturing or medical device manufacturing 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.
     (11) "Qualified machinery and equipment" means all new industrial and research fixtures, equipment, and support facilities that are an integral and necessary part of a biotechnology product manufacturing or medical device manufacturing operation. "Qualified machinery and equipment" includes: Computers; software; data processing equipment; laboratory equipment; manufacturing components such as belts, pulleys, shafts, and moving parts; molds, tools, and dies; operating structures; and all equipment used to control or operate the machinery.
     (12) "Recipient" means a person receiving a tax deferral under this chapter.

NEW SECTION.  Sec. 3   Application for deferral of taxes under this chapter must be made and approved before initiation of the construction of the investment project or acquisition of equipment or machinery. 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 department shall rule on the application within sixty days.

NEW SECTION.  Sec. 4   (1) 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 for each eligible investment project.
     (2) No certificate shall be issued for an eligible investment project under this chapter and chapter 82.60 or 82.63 RCW.
     (3) The department shall keep a running total of all deferrals granted under this chapter during each fiscal biennium.
     (4) This section expires January 1, 2017.

NEW SECTION.  Sec. 5   (1) Except as provided in subsection (2) of this section and section 8 of this act, taxes deferred under this chapter need not be repaid.
     (2)(a) If, on the basis of the survey under section 8 of this act or other information, the department finds that an investment project is used for purposes other than qualified biotechnology product manufacturing or medical device manufacturing activities at any time during the calendar year in which the eligible 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 and payable according to the following schedule:

NEW SECTION.  Sec. 6   Chapter 82.32 RCW applies to the administration of this chapter.

NEW SECTION.  Sec. 7   Applications, surveys, and any other information received by the department under this chapter are not confidential and are subject to disclosure.

NEW SECTION.  Sec. 8   A new section is added to chapter 82.32 RCW to read as follows:
     (1) For the purposes of this section, "biotechnology product and medical device business tax incentive" or "tax incentive" means the sales and use tax deferrals under chapter 82.-- RCW (sections 1 through 7 of this act), the preferential tax rates under section 9 of this act, or the tax credit under section 10 of this act.
     (2) 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 to evaluate whether the stated goals of legislation were achieved.
     (3) The goals of the biotechnology product and medical device business tax incentives are to:
     (a) Encourage the creation, expansion, and retention of commercial biotechnology product and medical device manufacturing operations and related job opportunities; and
     (b) Fully mature the life sciences industry by creating a sustainable commercial sector.
     (4)(a) A person who receives the benefit of a biotechnology product and medical device business tax incentive shall provide an annual survey to the department. The survey is due by March 31st following any year in which a tax incentive is claimed or used. The survey shall not include names of employees. The survey shall include the amount of the tax incentives claimed or used for the reporting year. 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.
     (b) The department may request additional information necessary to measure the results of the tax incentive, to be submitted at the same time as the survey.
     (c) All information collected under this subsection, except the amount of the tax incentive claimed or used, is deemed taxpayer information under RCW 82.32.330 and is not disclosable. Information on the amount of tax incentive claimed or used is not subject to the confidentiality provisions of RCW 82.32.330 and may be disclosed to the public upon request.
     (5) 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.
     (6) If a person fails to submit an annual survey under subsection (4)(a) of this section by the due date of the survey, the department shall declare the amount of taxes credited as provided in section 10 of this act, or reduced in the case of a preferential business and occupation tax rate in section 9 of this act, for that year to be immediately due and payable, and for taxes deferred under chapter 82.--RCW (sections 1 through 7 of this act) 12.5 percent of the deferred tax from the date of deferral shall be immediately due and payable. Excise taxes payable under this subsection are subject to interest but not penalties, as provided under this chapter. This information is not subject to the confidentiality provisions of RCW 82.32.330 and may be disclosed to the public upon request.
     (7) The department shall use the information to study the tax specified in subsection (1) of this section. The department shall report to the legislature by December 1, 2009, and December 1, 2015. The reports shall measure the number of new biotechnology product and medical device manufacturing facilities established in Washington, the amount of investment in biotechnology product and medical device manufacturing facilities, the number of facilities and investment by firms that utilized the biotechnology product and medical device business tax incentive, the number of biotechnology product and medical device manufacturing jobs in these facilities, the wages and benefits paid for biotechnology product and medical device manufacturing jobs, and the wages and benefits of biotechnology product and medical device manufacturing jobs compared to wages and benefits of other manufacturing jobs and jobs in other economic sectors.

NEW SECTION.  Sec. 9   A new section is added to chapter 82.04 RCW, to be codified between RCW 82.04.230 and 82.04.298, to read as follows:
     (1) Upon every person engaging within this state in the business of biotechnology product manufacturing or medical device manufacturing; as to such persons the amount of tax with respect to such business shall, in the case of manufacturers be equal to the value of the product manufactured, or in the case of processors for hire be equal to the gross proceeds of sales, multiplied by the rate of 0.138 percent.
     (2) Upon every person engaging within this state in the business of making sales at wholesale or sales at retail of biotechnology products or medical devices manufactured by that person; as to such persons the amount of tax with respect to such business shall be equal to the gross proceeds of sales of biotechnology products or medical devices, multiplied by the rate of 0.138 percent.
     (3) The definitions in section 2 of this act apply to this section.
     (4) This section expires January 1, 2017.

NEW SECTION.  Sec. 10   A new section is added to chapter 82.04 RCW to read as follows:
     (1) There may be credited against the tax imposed by this chapter, the value of state-approved, employer-provided or sponsored job training services designed to enhance the job-related performance of employees, for those businesses engaged in biotechnology product manufacturing or medical device manufacturing.
     (2) The value of the state-approved job training services provided by the employer to the employee, without charge, shall be determined by the allocation of the cost method using generally accepted accounting standards.
     (3) The credit allowed under this section shall be limited to an amount equal to twenty percent of the value of the state-approved job training services determined under subsection (2) of this section.
     (4) Prior to claiming the credit under this section, the business must obtain approval of the proposed job training service from the local work force investment board. The employer's request for approval must include a description of the proposed job training service, how the job training will enhance the employee's performance, and the cost of the proposed job training.
     (5) A credit earned during one calendar year may be carried forward to subsequent calendar years until used. No refunds shall be granted for credits under this section.
     (6) Credit may not be claimed under this section if the business is taking the credit under RCW 82.04.4333.
     (7) This section only applies to training for which an application is approved on or after July 1, 2006.
     (8) "Biotechnology product," "manufacturing," and "medical device" have the meanings provided in section 2 of this act.
     (9) This section expires January 1, 2017.

Sec. 11   RCW 82.04.440 and 2005 c 301 s 3 are each amended to read as follows:
     (1) Every person engaged in activities which are within the purview of the provisions of two or more of sections RCW 82.04.230 to 82.04.298, inclusive, shall be taxable under each paragraph applicable to the activities engaged in.
     (2) Persons taxable under RCW 82.04.2909(2), 82.04.250, 82.04.270, 82.04.294(2), ((or)) 82.04.260 (4), or (((13))) section 9(2) of this act with respect to selling products in this state shall be allowed a credit against those taxes for any (a) manufacturing taxes paid with respect to the manufacturing of products so sold in this state, and/or (b) extracting taxes paid with respect to the extracting of products so sold in this state or ingredients of products so sold in this state. Extracting taxes taken as credit under subsection (3) of this section may also be taken under this subsection, if otherwise allowable under this subsection. The amount of the credit shall not exceed the tax liability arising under this chapter with respect to the sale of those products.
     (3) Persons taxable under RCW 82.04.240 or 82.04.260(1)(b) shall be allowed a credit against those taxes for any extracting taxes paid with respect to extracting the ingredients of the products so manufactured in this state. The amount of the credit shall not exceed the tax liability arising under this chapter with respect to the manufacturing of those products.
     (4) Persons taxable under RCW 82.04.230, 82.04.240, 82.04.2909(1), 82.04.294(1), ((or)) 82.04.260 (1), (2), (4), (((6),)) or (((13))) (11), or section 9(1) of this act with respect to extracting or manufacturing products in this state shall be allowed a credit against those taxes for any (i) gross receipts taxes paid to another state with respect to the sales of the products so extracted or manufactured in this state, (ii) manufacturing taxes paid with respect to the manufacturing of products using ingredients so extracted in this state, or (iii) manufacturing taxes paid with respect to manufacturing activities completed in another state for products so manufactured in this state. The amount of the credit shall not exceed the tax liability arising under this chapter with respect to the extraction or manufacturing of those products.
     (5) For the purpose of this section:
     (a) "Gross receipts tax" means a tax:
     (i) Which is imposed on or measured by the gross volume of business, in terms of gross receipts or in other terms, and in the determination of which the deductions allowed would not constitute the tax an income tax or value added tax; and
     (ii) Which is also not, pursuant to law or custom, separately stated from the sales price.
     (b) "State" means (i) the state of Washington, (ii) a state of the United States other than Washington, or any political subdivision of such other state, (iii) the District of Columbia, and (iv) any foreign country or political subdivision thereof.
     (c) "Manufacturing tax" means a gross receipts tax imposed on the act or privilege of engaging in business as a manufacturer, and includes (i) the taxes imposed in RCW 82.04.240, 82.04.2909(1), 82.04.260 (1), (2), (4), and (((13))) (11), ((and)) 82.04.294(1), and section 9(1) of this act; and (ii) similar gross receipts taxes paid to other states.
     (d) "Extracting tax" means a gross receipts tax imposed on the act or privilege of engaging in business as an extractor, and includes the tax imposed in RCW 82.04.230 and similar gross receipts taxes paid to other states.
     (e) "Business", "manufacturer", "extractor", and other terms used in this section have the meanings given in RCW 82.04.020 through 82.04.212, notwithstanding the use of those terms in the context of describing taxes imposed by other states.

Sec. 12   RCW 82.32.600 and 2005 c 514 s 1002 are each amended to read as follows:
     (1) Persons required to file surveys under RCW 82.04.4452 must electronically file with the department all surveys, returns, and any other forms or information the department requires in an electronic format as provided or approved by the department, unless the department grants relief under subsection (2) of this section. As used in this section, "returns" has the same meaning as "return" in RCW 82.32.050.
     (2) Upon request, the department may relieve a person of the obligations in subsection (1) of this section if the person's taxes have been reduced a cumulative total of less than one thousand dollars from all of the credits, exemptions, or preferential business and occupation tax rates, for which a person is required to file an annual survey under RCW 82.04.4452, 82.32.535, 82.32.545, 82.32.570, 82.32.560, 82.60.070, ((or)) 82.63.020, or section 8 of this act.
     (3) Persons who no longer qualify for relief under subsection (2) of this section will be notified in writing by the department and must comply with subsection (1) of this section by the date provided in the notice.
     (4) Any survey, return, or any other form or information required to be filed in an electronic format under subsection (1) of this section is not filed until received by the department in an electronic format.

NEW SECTION.  Sec. 13   This act takes effect July 1, 2006.

NEW SECTION.  Sec. 14   Sections 1 through 7 of this act constitute a new chapter in Title 82 RCW.

NEW SECTION.  Sec. 15   If any provision of this act or its application to any person or circumstance is held invalid, the remainder of the act or the application of the provision to other persons or circumstances is not affected.