BILL REQ. #:  S-4457.1 

READ FIRST TIME 02/11/14.   

     AN ACT Relating to extending tax preferences for high-technology research and development; amending RCW 82.04.4452 and 82.63.030; and providing expiration dates.

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

NEW SECTION.  Sec. 101   This section is the tax preference performance statement for the tax credit contained in section 102 of this act. This performance statement is only intended to be used for subsequent evaluation of the tax preference. It is not intended to create a private right of action by any party or be used to determine eligibility for preferential tax treatment.
     (1) The legislature categorizes this tax exemption as one intended to improve industry competitiveness and create or retain jobs, as indicated in RCW 82.32.808(2) (b) and (c).
     (2) It is the legislature's specific public policy objective to improve industry competitiveness, and create or retain more jobs. It is the legislature's intent to provide a business and occupation tax credit for high technology companies performing research and development in the fields of advanced computing, advanced materials, biotechnology, electronic device technology, or environmental technology, in order to reduce the business costs of performing research and development in specified areas, thereby encouraging investments in research and development, thereby increasing the number of firms in the industry performing research and development activities, thereby increasing the number of jobs performing research and development in the high technology industry.
     (3) If a review finds that the number of businesses participating in this credit program, and the overall number of jobs for businesses participating in this credit program performing research and development, have increased compared to the number at the time of enactment, then the legislature intends to extend the expiration date of the tax preference.
     (4) In order to obtain the data necessary to perform the review in subsection (3) of this section, the joint legislative audit and review committee may refer to: (a) Employment data available from the employment security department; and (b) North American industrial code system (NAICS) from the department of revenue.

Sec. 102   RCW 82.04.4452 and 2010 c 114 s 114 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)(a) The credit is calculated as follows:
     (((a))) (i) 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))) (ii) Subtract 0.92 percent of the person's taxable amount from the amount determined under (a)(i) of this subsection;
     (((c))) (iii) Multiply the amount determined under (b) of this subsection by the following:
     (((i))) (A) For the period June 10, 2004, through December 31, 2006, the person's average tax rate for the calendar year for which the credit is claimed;
     (((ii))) (B) For the calendar year ending December 31, 2007, the greater of the person's average tax rate for that calendar year or 0.75 percent;
     (((iii))) (C) For the calendar year ending December 31, 2008, the greater of the person's average tax rate for that calendar year or 1.0 percent;
     (((iv))) (D) For the calendar year ending December 31, 2009, the greater of the person's average tax rate for that calendar year or 1.25 percent;
     (((v))) (E) For the calendar year ending December 31, 2010, and thereafter, 1.50 percent.
     (b) For purposes of calculating the credit, if a person's reporting period is less than annual, the person may use an estimated average tax rate for the calendar year for which the credit is claimed by using the person's average tax rate for each reporting period. A person who uses an estimated average tax rate must make an adjustment to the total credit claimed for the calendar year using the person's actual average tax rate for the calendar year when the person files its last return for the calendar year for which the credit is claimed.
     (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, must be claimed 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 may not exceed the lesser of two million dollars or the amount of tax otherwise due under this chapter for the calendar year.
     (5) For any person claiming 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 or who is otherwise ineligible, the department must declare the taxes against which the credit was claimed to be immediately due and payable. The department must assess interest, but not penalties, on the taxes against which the credit was claimed. Interest must be assessed at the rate provided for delinquent excise taxes under chapter 82.32 RCW, retroactively to the date the credit was claimed, and accrues until the taxes against which the credit was claimed are repaid. Any credit assigned to a person under subsection (3) of this section that is disallowed as a result of this section may be claimed by the person who performed the qualified research and development subject to the limitations set forth in subsection (4) of this section.
     (6) A person claiming the credit provided in this section must file a complete annual survey with the department under RCW 82.32.585.
     (7) ((For the purpose of this section:)) The definitions in this subsection apply throughout this section unless the context clearly requires otherwise.
     (a) "Average tax rate" means a person's total tax liability under this chapter for the calendar year for which the credit is claimed divided by the taxpayer's total taxable amount under this chapter for the calendar year for which the credit is claimed.
     (b) "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) "Qualified research and development" ((shall have)) has the same meaning as provided in RCW 82.63.010.
     (d) "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) "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 for the calendar year for which the credit is claimed, less any taxable amount for which a credit is allowed under RCW 82.04.440.
     (8) This section expires January 1, ((2015)) 2040.

NEW SECTION.  Sec. 201   This section is the tax preference performance statement for the tax deferral contained in section 202 of this act. This performance statement is only intended to be used for subsequent evaluation of the tax preference. It is not intended to create a private right of action by any party or be used to determine eligibility for preferential tax treatment.
     (1) The legislature categorizes this tax exemption as one intended to improve industry competitiveness and create or retain jobs, as indicated in RCW 82.32.808(2) (b) and (c).
     (2) It is the legislature's specific public policy objective to improve industry competitiveness, and create or retain jobs. It is the legislature's intent to provide a sales and use tax deferral for certain construction and equipment purchases for new and expending high technology companies conducting research and development and pilot scale manufacturing in the fields of advanced computing, advanced materials, biotechnology, electronic device technology, or environmental technology, in order to reduce the cost of certain construction and equipment purchases used for research and development, thereby increasing the number of firms in the industry performing research and development activities, thereby increasing the number of jobs performing research and development in the high technology industry.
     (3) If a review finds that the number of businesses participating in the deferral program, and the overall number of jobs for businesses participating in the deferral program performing research and development, have increased compared to the number at the time of enactment, then the legislature intends to extend the expiration date of the tax preference.
     (4) In order to obtain the data necessary to perform the review in subsection (3) of this section, the joint legislative audit and review committee may refer to: (a) Employment data available from the employment security department; and (b) North American industrial code system (NAICS) from the department of revenue.

Sec. 202   RCW 82.63.030 and 2008 c 15 s 4 are each amended to read as follows:
     (1) Except as provided in subsection (2) of this section, the department ((shall)) must 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 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)) expires January 1, ((2015)) 2040.

Sec. 301   RCW 82.08.02565 and 2011 c 23 s 2 are each amended to read as follows:
     (1)(a) The tax levied by RCW 82.08.020 does not apply to sales to a manufacturer or processor for hire of machinery and equipment used directly in a manufacturing operation or research and development operation, to sales to a person engaged in testing for a manufacturer or processor for hire of machinery and equipment used directly in a testing operation, or to sales of or charges made for labor and services rendered in respect to installing, repairing, cleaning, altering, or improving the machinery and equipment.
     (b) Sellers making tax-exempt sales under this section must obtain from the purchaser an exemption certificate in a form and manner prescribed by the department by rule. The seller must retain a copy of the certificate for the seller's files.
     (2) For purposes of this section and RCW 82.12.02565:
     (a) "Machinery and equipment" means industrial fixtures, devices, and support facilities, and tangible personal property that becomes an ingredient or component thereof, including repair parts and replacement parts. "Machinery and equipment" includes pollution control equipment installed and used in a manufacturing operation, testing operation, or research and development operation to prevent air pollution, water pollution, or contamination that might otherwise result from the manufacturing operation, testing operation, or research and development operation. "Machinery and equipment" also includes digital goods.
     (b) "Machinery and equipment" does not include:
     (i) Hand-powered tools;
     (ii) Property with a useful life of less than one year;
     (iii) Buildings, other than machinery and equipment that is permanently affixed to or becomes a physical part of a building; and
     (iv) Building fixtures that are not integral to the manufacturing operation, testing operation, or research and development operation that are permanently affixed to and become a physical part of a building, such as utility systems for heating, ventilation, air conditioning, communications, plumbing, or electrical.
     (c) Machinery and equipment is "used directly" in a manufacturing operation, testing operation, or research and development operation if the machinery and equipment:
     (i) Acts upon or interacts with an item of tangible personal property;
     (ii) Conveys, transports, handles, or temporarily stores an item of tangible personal property at the manufacturing site or testing site;
     (iii) Controls, guides, measures, verifies, aligns, regulates, or tests tangible personal property at the site or away from the site;
     (iv) Provides physical support for or access to tangible personal property;
     (v) Produces power for, or lubricates machinery and equipment;
     (vi) Produces another item of tangible personal property for use in the manufacturing operation, testing operation, or research and development operation;
     (vii) Places tangible personal property in the container, package, or wrapping in which the tangible personal property is normally sold or transported; or
     (viii) Is integral to research and development as defined in RCW 82.63.010.
     (d) "Manufacturer" means a person that qualifies as a manufacturer under RCW 82.04.110. "Manufacturer" also includes a person that prints newspapers or other materials.
     (e) "Manufacturing" means only those activities that come within the definition of "to manufacture" in RCW 82.04.120 and are taxed as manufacturing or processing for hire under chapter 82.04 RCW, or would be taxed as such if such activity were conducted in this state or if not for an exemption or deduction. "Manufacturing" also includes printing newspapers or other materials. An activity is not taxed as manufacturing or processing for hire under chapter 82.04 RCW if the activity is within the purview of chapter 82.16 RCW.
     (f) "Manufacturing operation" means the manufacturing of articles, substances, or commodities for sale as tangible personal property. A manufacturing operation begins at the point where the raw materials enter the manufacturing site and ends at the point where the processed material leaves the manufacturing site. With respect to the production of class A or exceptional quality biosolids by a wastewater treatment facility, the manufacturing operation begins at the point where class B biosolids undergo additional processing to achieve class A or exceptional quality standards. Notwithstanding anything to the contrary in this section, the term also includes that portion of a cogeneration project that is used to generate power for consumption within the manufacturing site of which the cogeneration project is an integral part. The term does not include the preparation of food products on the premises of a person selling food products at retail.
     (g) "Cogeneration" means the simultaneous generation of electrical energy and low-grade heat from the same fuel.
     (h) "Research and development operation" means engaging in research and development as defined in RCW 82.63.010 by a manufacturer or processor for hire, if the research and development is integral to the buyer's development of prewritten computer software for sale as a product or a service described in RCW 82.04.050(6)(b), or the buyer's manufacturing operation. For purposes of this section and RCW 82.12.02565, persons engaged in the development of prewritten computer software that is not transferred to purchasers by means of a tangible storage media are deemed to be manufacturers.
     (i) "Testing" means activities performed to establish or determine the properties, qualities, and limitations of tangible personal property.
     (j) "Testing operation" means the testing of tangible personal property for a manufacturer or processor for hire. A testing operation begins at the point where the tangible personal property enters the testing site and ends at the point where the tangible personal property leaves the testing site. The term also includes the testing of tangible personal property for use in that portion of a cogeneration project that is used to generate power for consumption within the manufacturing site of which the cogeneration project is an integral part. The term does not include the testing of tangible personal property for use in the production of electricity by a light and power business as defined in RCW 82.16.010 or the preparation of food products on the premises of a person selling food products at retail.
     (3) It is the intent of the legislature that this tax preference is being amended to correct a technical inconsistency, and these corrections are not intended to create a new or expanded tax preference under RCW 82.32.805.