BILL REQ. #:  S-4088.3 

READ FIRST TIME 01/23/04.   

     AN ACT Relating to high technology and research and development tax incentives; amending RCW 82.04.4452, 82.63.010, 82.63.020, 82.63.030, 82.63.045, and 82.63.070; adding new sections to chapter 82.04 RCW; creating a new section; 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 recruiting and retaining high technology companies is a critical component of creating a strong economy for Washington's future. This strong economy is vital to provide the public and private resources to support a diverse array of essential government and social services. The legislature also finds that numerous states and countries are using an extensive series of economic incentives to compete for these same high technology companies and the high-wage direct and indirect jobs they create.
     The legislature also finds that high technology companies of all sizes must continue to invest in research and development to discover new ideas that lead to new products and processes that significantly improve the quality of life of all citizens of Washington state. The legislature finds that the business and occupations tax credit is intended to promote investment in initial research and development by high technology companies to explore new ideas. The legislature further finds that the sales tax deferral and exemption is intended to promote investment in the capital facilities that house the people and equipment necessary to further evaluation of these new ideas.
     The legislature finds that the business and occupation tax credit for investment in research and development and a sales tax deferral and exemption for investment in capital facilities to conduct research and development are designed to work together to encourage new ideas and transform them into products and processes. Therefore, the legislature directs that these incentives shall be evaluated together to determine their joint ability to create direct, indirect, and induced economic benefits for the people of the state of Washington.

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 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 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 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)) 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)(a) A person claiming the credit shall agree to supply the department with information ((necessary to measure the results of the tax credit program for qualified research and development expenditures)) on research and development spending, and product development, which may be measured by a proxy such as research projects, copyrights, trademarks, or patents issued. The survey information is deemed tax information under RCW 82.32.330.
     (b) If a person fails to provide the information 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) The ((department)) joint legislative audit and review committee shall use the information ((required under)) from subsection (7) of this section and from other state agency sources to ((perform three assessments on)) study the tax credit program authorized under this section. ((The assessments will take place in 1997, 2000, and 2003. The department shall prepare reports on each assessment and deliver their reports by September 1, 1997, September 1, 2000, and September 1, 2003. The assessments)) The committee shall report to the legislature by December 1, 2013. The study 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 as measured by copyrights, trademarks, and overall patent issuance, the diversification of the state's economy, growth in research and development investment, and the movement of firms or the consolidation of firms' operations into the state((, and such other factors as the department selects)). In conducting this evaluation, the committee shall:
     (a) Use a generally accepted econometric model and contract with outside experts; and
     (b) Evaluate the direct, indirect, and induced impacts of this program together with the program authorized under RCW 82.63.020.
     (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)) January 1, 2015.

Sec. 3   RCW 82.63.010 and 1995 1st sp.s. c 3 s 12 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 unless)); or (b)(i) the lessor by written contract agrees to pass the economic benefit of the deferral to the lessee in the form of reduced rent payments, and (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). The economic benefit of the deferral to the lessee may be evidenced by any type of payment, credit, or any 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.
     (11) "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) "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) "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) "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) "Recipient" means a person receiving the economic benefit of a tax deferral under this chapter. If the economic benefit of the tax deferral is passed to a lessee as provided under subsection (7) of this section, then the lessee shall be the recipient.
     (16) "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) "Initiation of construction" means the date that a building permit is issued for (a) the construction of the qualified building, in the event the underlying ownership of the building vests exclusively with the person receiving the economic benefit of the deferral, or (b) tenant improvements for a qualified building, in the event the economic benefits of the deferral are passed through to a lessee as provided in subsection (7) of this section. The initiation of construction does not include soil testing, site clearing and grading, site preparation, or any other related activities that are initiated prior to the issuance of a building permit for the construction of the foundation of the building. If the investment project is a phased project, the term initiation of construction shall apply separately to each phase.

Sec. 4   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. 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.
     (2) Applicants for deferral of taxes under this chapter shall agree to ((supply)) complete an annual survey, supplying the department with nonproprietary information necessary to measure the results of the tax deferral program for high-technology research and development and pilot scale manufacturing facilities. The survey may include questions pertaining to job creation, job retention, the number of full-time equivalent positions created, overall industry wage levels, company growth, introduction of new products, growth in research and development investment, and movement of firms or the consolidation of firms' operations into the state. The information is due by March 31st the year following the calendar year in which the applicant applied for the deferral and for the eight years after the investment project is certified by the department as having been operationally complete. The survey information is deemed tax information under RCW 82.32.330.
     (3) The ((department)) joint legislative audit and review committee shall use the information and information available from state agency sources to ((perform three assessments on)) study the tax deferral program authorized under this chapter. ((The assessments will take place in 1997, 2000, and 2003.)) The ((department)) committee shall ((prepare reports on each assessment and deliver their reports by September 1, 1997, September 1, 2000, and September 1, 2003)) report to the legislature by December 1, 2013. The ((assessments)) report 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 as measured by trademarks, copyrights, or overall patent issuance, the diversification of the state's economy, growth in research and development investment, and the movement of firms or the consolidation of firms' operations into the state((, and such other factors as the department selects)). In conducting this evaluation, the committee shall:
     (a) Use a generally accepted econometric model and contract with outside experts; and
     (b) Evaluate the direct, indirect, and induced impacts of this program together with the program authorized under RCW 82.63.020.

Sec. 5   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.
     (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)) January 1, ((2004)) 2015.

Sec. 6   RCW 82.63.045 and 2000 c 106 s 10 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 ((a report)) 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:

Sec. 7   RCW 82.63.070 and 1994 sp.s. c 5 s 9 are each amended to read as follows:
     Applications ((and 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 82.04 RCW to read as follows:
     This chapter does not apply to amounts received by any person for research and development under the federal small business innovation research program (114 Stat. 2763A; 15 U.S.C. Sec. 638 et seq.).

NEW SECTION.  Sec. 9   A new section is added to chapter 82.04 RCW to read as follows:
     This chapter does not apply to amounts received by any person for research and development under the federal small business technology transfer program (115 Stat. 263; 15 U.S.C. Sec. 638 et seq.).

NEW SECTION.  Sec. 10   Sections 8 and 9 of this act take effect July 1, 2004.