BILL REQ. #:  H-5370.1 

READ FIRST TIME 02/05/08.   

     AN ACT Relating to business and occupation tax incentives to encourage investment in qualified community development entities; adding a new section to chapter 82.04 RCW; creating a new section; and providing an expiration date.

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

NEW SECTION.  Sec. 1   A new section is added to chapter 82.04 RCW to read as follows:
     (1) The definitions in this subsection (1) apply throughout this section unless the context clearly requires otherwise.
     (a) "Applicable percentage" means zero percent for each of the first two credit allowance dates, twelve percent for the third and fourth credit allowance dates, and fifteen percent for the fifth credit allowance date.
     (b) "Credit allowance date," with respect to any qualified equity investment means:
     (i) The date on which such investment is initially made; and
     (ii) Each of the six anniversary dates of such date thereafter.
     (c) "Direct tracing" means the tracking, by accepted accounting methods, of the proceeds of qualified equity investments into qualified low-income community investments.
     (d) "Long-term debt security" means any debt instrument issued by a qualified community development entity, at par value or a premium, with an original maturity date of at least seven years from the date of its issuance, with no acceleration of repayment, amortization, or prepayment features prior to its original maturity date, and with no distribution, payment, or interest features related to the profitability of the qualified community development entity or the performance of the qualified community development entity's investment portfolio. The foregoing in no way limits the holder's ability to accelerate payments on the debt instrument in situations where the issuer has defaulted on covenants designed to ensure compliance with this section or Title 26 U.S.C. Sec. 45D of the federal internal revenue code of 1986, as amended.
     (e) "Purchase price" means the amount paid to the issuer of a qualified equity investment for such qualified equity investment.
     (f) "Qualified active low-income community business" is defined as provided in Title 26 U.S.C. Sec. 45D of the federal internal revenue code of 1986, as amended, as of January 1, 2008. However, any business that derives or projects to derive fifteen percent or more of its annual revenue from the rental or sale of real estate may not be considered to be a qualified active low-income community business.
     (g) "Qualified community development entity" is defined as provided in Title 26 U.S.C. Sec. 45D of the federal internal revenue code of 1986, as amended, as of January 1, 2008, if such entity has entered into an allocation agreement with the community development financial institutions fund of the United States treasury department with respect to credits authorized by Title 26 U.S.C. Sec. 45D of the federal internal revenue code of 1986, as amended, which includes the state of Washington within the service area set forth in such allocation agreement.
     (h) "Qualified equity investment" means:
     (i) Any equity investment in, or long-term debt security issued by, a qualified community development entity that:
     (A) Is acquired after the effective date of this act at its original issuance solely in exchange for cash;
     (B) Has at least eighty-five percent of its cash purchase price used by the issuer to make qualified low-income community investments; and
     (C) Is designated by the issuer as a qualified equity investment under this subsection (1)(h)(i)(C) and is certified by the department as not exceeding the limitation contained in subsection (4) of this section.
     (ii) "Qualified equity investment" includes any qualified equity investment that does not meet the provisions of (h)(i) of this subsection, if such investment was a qualified equity investment in the hands of a prior holder.
     (i) "Qualified low-income community investment" means any capital or equity investment in, or loan to, any qualified active low-income community business. With respect to any one qualified active low-income community business, the maximum amount of qualified low-income community investments made in such business, on a collective basis with all of its affiliates, must be ten million dollars whether issued to one or several qualified community development entities.
     (j) "Tax credit" means a credit against the tax otherwise due under this chapter.
     (k) "Taxpayer" means any individual or entity subject to the tax imposed under this chapter.
     (2) A taxpayer that makes a qualified equity investment is entitled to a tax credit against the tax otherwise imposed under this chapter as follows:
     (a) On each credit allowance date of a qualified equity investment, the taxpayer or subsequent holder of the qualified equity investment, is entitled to a tax credit during the taxable year, which includes the credit allowance date;
     (b) The tax credit amount is equal to the applicable percentage multiplied by the purchase price paid to the issuer of such qualified equity investment; and
     (c) The amount of the tax credit claimed may not exceed the amount of the taxpayer's tax liability under this chapter for the tax year for which the tax credit is claimed.
     (3) No tax credit claimed under this section is refundable or saleable on the open market. Tax credits earned by a partnership, limited liability company, s-corporation, or other pass-through entity may be allocated to the partners, members, or shareholders of such entity for their direct use in accordance with the provisions of any agreement among such partners, members, or shareholders. Any amount of tax credit that the taxpayer is prohibited from claiming under this section in a taxable year may be carried forward to any of the taxpayer's five subsequent taxable years.
     (4) The department must limit the monetary amount of qualified equity investments permitted under this section to a level necessary to limit tax credit utilization at no more than fifteen million dollars of tax credits in any fiscal year. The limitation on qualified equity investments must be based on the anticipated utilization of credits without regard to the potential for taxpayers to carry forward tax credits to later tax years.
     (5) The issuer of the qualified equity investment must certify to the department the anticipated dollar amount of such investments to be made in this state during the first twelve-month period following the initial credit allowance date. If on the second credit allowance date, the actual dollar amount of such investments is different than the amount estimated, the department shall adjust the credits arising on the second allowance date to account for such difference.
     (6)(a) Provided that the proceeds of a qualified equity investment are invested completely in qualified low-income community investments in Washington state, the purchase price, for the purpose of calculating the credit created by this act, is equal to one hundred percent of the qualified equity investment, regardless of the location of investments made with the proceeds of other qualified equity investments issued by the same community development entity.
     (b) To the extent a portion of a qualified equity investment is not invested in Washington state, the purchase price is reduced by the same ratio in (a) of this subsection, independently of the location of investments made with proceeds of other qualified equity investments issued by the same community development entity. In such case, the burden is on the community development entity to establish the extent to which the qualified equity investments are fully invested in Washington state, either by establishing that the community development entity itself invests exclusively in Washington state, or otherwise establishing, through direct tracing, the portion of a qualified equity investment invested solely in Washington state.
     (7) The department must recapture, from the taxpayer that claimed the credit on a return, the tax credit allowed under this section if:
     (a) Any amount of the federal tax credit available with respect to a qualified equity investment that is eligible for a tax credit under this section is recaptured under Title 26 U.S.C. Sec. 45D of the federal internal revenue code of 1986, as amended. In such case the department's recapture must be proportionate to the federal recapture with respect to such qualified equity investment; or
     (b) The issuer redeems or makes principal repayment with respect to a qualified equity investment prior to the seventh anniversary of the issuance of such qualified equity investment. In such case the department's recapture must be proportionate to the amount of the redemption or repayment with respect to the qualified equity investment, except as provided otherwise in subsection (8) of this section.
     (8) The provisions of subsection (7)(b) of this section do not apply and an investment will be considered held by an issuer, even if the investment has been sold or repaid, when the issuer reinvests an amount equal to the capital returned to or recovered by the issuer from the original investment, exclusive of any profits realized, in another qualified low-income community investment within twelve months of the receipt of such capital. An issuer may not be required to reinvest capital returned from qualified low-income community investments after the sixth anniversary of the issuance of the qualified equity investment, the proceeds of which were used to make the qualified low-income community investment, and the qualified low-income community investment shall be considered held by the issuer through the seventh anniversary of the qualified equity investment's issuance.
     (9)(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) Except as may be required otherwise by department rule under (c) of this subsection, a person claiming a tax credit under this section must file a survey with the department by July 1, 2013. The survey must include:
     (i) The amount of tax credit claimed under this section;
     (ii) The types and locations of projects that were invested in and the amount of private equity investment leveraged due to the tax credits claimed under this section; and
     (iii) Information, as determined by the department, about employment positions, including but not limited to the number, types, and salary and wages of jobs created in the low-income community businesses in which qualified equity investments were made to claim the tax credits under this section.
     (c) The department may, as necessary to measure the results of the tax credit program, request additional information to be submitted with the survey or more frequent surveys.
     (d) All information collected under this subsection, except the amount of the tax credit claimed, is deemed taxpayer information under RCW 82.32.330. Information on the amount of tax credit claimed is not subject to the confidentiality provisions of RCW 82.32.330 and may be disclosed to the public upon request. If the amount of the tax credit as reported on the survey is different than the amount actually claimed on the taxpayer's tax returns or otherwise allowed by the department, the amount actually claimed or allowed may be disclosed.
     (e) The department shall use the information required under this subsection to report on the tax credit program authorized under this section. The department must report to the appropriate committees of the legislature by December 1, 2013, on:
     (i) The amount of tax credits taken under this section;
     (ii) The types and locations of projects that were invested in and the amount of private equity investment leveraged due to the tax credits provided under this section;
     (iii) The effect of the tax credit program on job creation in low-income community businesses, including the number, types, and salary and wages of jobs created for Washington residents;
     (iv) The impact on low-income community business growth and on capital available for investment in low-income community businesses; and
     (v) Such other related factors as the department selects.
     (10) To claim a credit under this section, a person must electronically file with the department all returns, forms, and other information the department requires in an electronic format as provided or approved by the department. Any return, form, or information required to be filed in an electronic format under this section is not filed until received by the department in an electronic format.
     (11) The department may develop rules to implement the provisions of this section and to administer the allocation of tax credits issued for qualified equity investments under this section, which must be conducted on a first-come, first-served basis.

NEW SECTION.  Sec. 2   This act may be known and cited as the "Washington state new markets development program".

NEW SECTION.  Sec. 3   This act expires December 31, 2013.