HB304 By Representatives Williams (P) and Ball RFD Technology and Research Rd 1 17-MAR-15

SYNOPSIS: Under existing law, there are no economic incentives or tax credits extended to Alabama businesses for qualified research expenses incurred by Alabama companies that spend funds and resources in-house, or pay Alabama research companies to conduct qualified research for new or improved products or services.

This bill would establish the Alabama Innovation Act that would provide for a research and development tax credit to certain Alabama companies modeled on the federal research and development tax credit. The credit would be 25 percent of new research at an Alabama research entity, and 5 percent for other new research conducted in Alabama. The credit could be taken against the income tax or the financial institution excise tax.

This bill would limit the Alabama Innovation tax credits to no more than $10 million of credits per year, and no eligible company or business could claim more than $2 million of credits. The credits would be claimed on a first-come, first-served basis.

A BILL TO BE ENTITLED AN ACT

To enact the Alabama Innovation Act; to allow a research and development tax credit for qualified research expenses in Alabama in the amount of 25 percent of new research at an Alabama research entity, and 5 percent of other research in Alabama; to provide that no more than $10 million of tax credits would be allowed in any year, and no one taxpayer would be allowed more than $2 million of tax credits in any year; to allow the credits to offset the taxes in Chapters 16 and 18 of Title 40, Code of Alabama 1975, and estimated payments thereof; to provide that the income tax credits shall not affect estimated income tax payments before October 1, 2016; to provide that earned but unused credits could be carried forward for 5 years; to provide for the distribution of the financial institution excise tax when the credit is claimed; to create an allocation system; to provide that economic development project agreements entered into with the state could allocate to the project tax credits which had not yet been allocated and could provide for transferability of the tax credits; and to provide that tax credits shall not be considered securities; to provide for proof that incentives are due to be granted; to provide for the promulgation of forms for information to be submitted to a department of state government, and that such submissions shall be treated as tax returns; to provide that no taxpayer shall have any right to credits that are granted absent strict compliance with this act; to require that the tax credit only apply to research falling within certain industries; to create a new Article 17 of Chapter 18 of Title 40, Code of Alabama 1975; to provide for the promulgation of regulations; to provide for the coordination between the availability of the federal research credit and the credit herein; to provide for the severability of invalid provisions; to provide for the repeal of conflicting laws; to provide for an effective date.

BE IT ENACTED BY THE LEGISLATURE OF ALABAMA:

Section 1. This act shall be known as the “Alabama Innovation Act”.

Section 2. A new Article 17 of Chapter 18 of Title 40, Code of Alabama 1975, is created to read as follows:

§ 40-18-390. For the purpose of this article, the following words and phrases shall have the following meanings:

(a) ALABAMA RESEARCH ENTITY. One or more of the following:

(1) A public or private university in the state;

(2) A university research foundation affiliated with a public or private university in the state;

(3) A public two-year college in the state;

(4) A publicly-owned hospital in the state;

(5) An entity duly formed, domiciled or qualified to do business in the state that meets each of the following criteria:

a. Is exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code of 1986, as amended;

b. Is predominantly engaged in research and non-commercial development activities undertaken for the purpose of discovering information that is technological or biotechnological in nature, involves a process of experimentation, and the application of which is intended to be used in the development of a new or improved product, service or treatment;

c. Has its headquarters and principal place of business in the state; and

d. Has, or is anticipated to have, at least 75 percent of its property and payroll in Alabama, using the property and payroll factor calculations found in Title 40.

(b) APPROVED ACTIVITY. The conduct of an activity that is predominantly any one or more of the following:

(1) Described by NAICS Code 1133, 115111, 2121, 22111, 221330, 31 (other than 311811), 32, 33, 423, 424, 482, 4862, 48691, 48699, 48819, 4882, 4883 (other than 48833), 493, 511, 5121 (other than 51213), 51221, 517, 518 (without regard to the premise that data processing and related services be performed in conjunction with a third party), 51913, 52232, 54133 (if predominantly in furtherance of another activity described in this article), 54134 (if predominantly in furtherance of another activity described in this article), 54138, 5415, 541614, 5417, 55 (if not for the production of electricity), 561422 (other than establishments that originate telephone calls), 562213, 56291, 56292, 611512, 927 or 92811.

(2) The production of biofuel as such term is defined in Section 2-2-90(c)(2).

(3) A target of the state’s economic development efforts pursuant to either of the following:

a. The Accelerate Alabama Strategic Economic Development Plan adopted in January 2012 by the Alabama Economic Development Alliance, created by Executive Order Number 21 of the Governor on July 18, 2011, or any amended version or successor document thereto or

b. A type listed in a regulation adopted by the Department of Commerce.

Notwithstanding the foregoing, an approved activity shall not predominantly include farming activities involving trees, animals or crops or the retail sale of tangible personal property or services. This provision shall not be deemed to exclude customer service centers, call centers or headquarters otherwise allowed as an approved activity.

(c) CONSORTIUM RESEARCH EXPENSES. Any amount paid or incurred by the taxpayer to any Alabama research entity for qualified research, but not including any expenses for research activities performed outside Alabama.

(d) CONTRACT RESEARCH EXPENSES. Any amount paid or incurred by the taxpayer to any person (other than an employee of the taxpayer) for qualified research, but not including any of the following:

(1) Consortium research expenses; or

(2) Expenses for research activities performed outside Alabama.

(e) DEPARTMENT. The Alabama Department of Revenue.

(f) IN-HOUSE RESEARCH EXPENSES. The meaning given in 26 U.S.C. § 41(b)(2), but not including wages paid or incurred to employees residing outside Alabama.

(g) NAICS CODE. Any sector, subsector, industry group, industry or national industry of the 2012 North American Industry Classification System, or any similar classification system developed in conjunction with the United States Department of Commerce or Office of Management and Budget.

(h) QUALIFIED RESEARCH. The meaning given in 26 U.S.C. § 41(d), if conducted in Alabama in pursuit of an approved activity.

In applying any terms in 26 U.S.C. § 41, “qualified research” shall have the meaning given herein.

§ 40-18-391.

(a) An innovation tax credit is allowed for qualified research conducted in Alabama. The tax credit shall be in an amount equal to the sum of the following:

(1) 5 percent of the following:

a. In-house research expenses and contract research expenses for qualified research conducted in Alabama during the taxable year, minus

b. In-house research expenses and contract research expenses conducted in Alabama, on average, over the 3 taxable years preceding the taxable year for which the credit is being determined.

(2) 25 percent of the following:

a. Consortium research expenses for qualified research conducted in Alabama during the taxable year, minus

b. Consortium research expenses conducted in Alabama, on average, over the 3 taxable years preceding the taxable year for which the credit is being determined.

(b) The tax credit may offset the taxes levied by Chapters 16 and 18, or as an estimated payment of the tax levied by Chapter 18, but not below zero. In no event shall the credits provided for by this article be allowed to reduce any estimated payment of the taxes levied by Chapter 18 before October 1, 2016.

(c) All other state income tax credits shall be applied prior to the application of the tax credit provided in this section.

§ 40-18-392.

(a) In any one year, if the innovation tax credit exceeds the amount of tax liability, the taxpayer may carry forward the unused tax credit. No carryforward shall be allowed for more than five years. Rules similar to those used for Section 40-18-15.2 shall be applied.

(b) A taxpayer may assign and convey a tax credit to another entity if substantially all of the assets of the taxpayer are assigned and conveyed in the same transaction. Proof of such transfer shall be submitted to the department.

(c) To the extent a tax credit under this Article is used to offset a financial institution excise tax liability, in making the report required by Section 40-16-6(d), the financial institution receiving the credit shall not take into account the activity for which the tax credit is given, and the Department of Finance shall promulgate regulations to ensure that the credit in no case would reduce the distribution for municipalities and counties.

(d) To the extent that the tax credit is utilized by the taxpayer or by a transferee, no deduction for the related expenses shall be allowed.

§ 40-18-393. The maximum amount of innovation tax credits all taxpayers shall be allowed under Section 40-18-391 in any one year shall be limited to $10 million, and no taxpayer shall receive an innovation tax credit of more than $2,000,000 in a single tax year. The tax credits shall be allocated among various taxpayers using the procedures in this section.

(a) Each taxpayer who wishes to claim a tax credit shall file an application with the department showing the amount of tax credit which the taxpayer expects in good faith to claim during the tax year. No application shall show an expected claim in excess of $2 million. The applications shall be submitted electronically to the department between March 15 and December 31, and such applications shall apply to the tax year that begins during that same calendar year.

(b) As applications are submitted, the department shall approve any the department deems sufficient, until the total approved applications represent $10 million of anticipated tax credits. All applications received on the day that the $10 million limit is reached shall receive approval for a pro rata share of the credits available at the start of that day. To the extent that the applications are not approved, the portion not approved shall be conditionally denied by the department. Taxpayers may continue to submit applications after the $10 million cap is reached, and applications that the department deems sufficient shall be conditionally denied but maintained in the order received.

(c) As tax returns for the corresponding tax year are submitted, if they show that approved tax credits are not actually claimed for use in the current or a carryforward year, the department shall approve, in the order they were received, the applications that were conditionally denied until the approved applications represent $10 million of anticipated tax credits.

(d) The calculations required to be made by the department shall be based on the initial returns filed by taxpayers who had tax credits approved. No taxpayer may amend a return to claim an approved innovation tax credit which was not claimed on its initial filed return, unless such amendment is to claim a credit conditionally denied.

§ 40-18-394. For any taxpayer that enters into an economic development project agreement with the state, the following shall apply:

(a) For any innovation tax credits which have not yet been allocated for the current or a future year pursuant to Section 40-18-393, the project agreement may provide for an allocation of innovation tax credits to the taxpayer, to the extent otherwise in compliance with this article. No such allocation of innovation tax credits shall be subject to the proration provided for in Section 40-18-393(b).

(b) The project agreement may provide that any innovation tax credits may be transferred to another taxpayer, in addition to the transfer rights provided by Section 40-18-392(b). In that event, the transferee may apply the tax credit to offset the taxes levied by Chapters 16 and 18, but not below zero. The following provisions shall apply:

(1) Section 40-18-392 shall apply to the transferee.

(2) A transfer shall not be allowed unless the taxpayer and the transferee are both subject to the tax levied by Chapter 16, or are both subject to the tax levied by Chapter 18.

(3) A transfer of the tax credit shall be made by written, notarized contract.

(4) Upon review of the contract and submission of other information required by the Department of Commerce, the Secretary of Commerce may issue a certificate of transferability and deliver the same to the department.

(5) At the conclusion of each year for which a tax credit is permitted to be transferred, the taxpayer shall certify to the department the amount of tax credit to which it is entitled. If the taxpayer is found to have transferred more than that amount, the taxpayer shall be liable for the underpayment of tax attributable to the tax credit and for penalties and interest thereon. Unless the purchase of the tax credit is determined to have been made in a fraudulent manner, or is a transfer in anticipation of bankruptcy, insolvency or closure, a transferee shall not be liable for the unpaid tax attributable to the tax credit, or for penalties or interest thereon.

(6) A transferee may not make a subsequent transfer of the credit.

(7) Tax credits shall not be considered securities under Section 8-6-2(10).

§ 40-18-395.

(a) All filings made by a private party with any department of the state government shall be made using forms promulgated by such department. Any such filing shall be treated as a tax return, subject to penalties imposed by the Department of Revenue.

(b) Nothing in this article shall be construed to make available to any taxpayer any right to the benefits conferred by this article absent strict compliance with this article.

(c) The Departments of Commerce and Revenue are authorized to promulgate regulations as necessary to implement and administer the provisions of this article. This article shall be construed generally to conform to 26 U.S.C. § 41, except for percentage reductions specified therein. In the event that 26 U.S.C. § 41 should not be allowed in any year, the credit provided in this article shall refer to 26 U.S.C. § 41, as it existed on the last day that it was allowed.

Section 3. If a court of competent jurisdiction adjudges invalid or unconstitutional any clause, sentence, paragraph, section, or part of this act, such judgment or decree shall not affect, impair, invalidate, or nullify the remainder of this act, but the effect of the decision shall be confined to the clause, sentence, paragraph, section, or part of this act adjudged to be invalid or unconstitutional.

Section 4. All laws or parts of laws which conflict with this act are repealed.