Legislature(2011 - 2012)BELTZ 105 (TSBldg)
02/17/2011 01:30 PM Senate LABOR & COMMERCE
| Audio | Topic |
|---|---|
| Start | |
| SB23 | |
| SB67 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 23 | TELECONFERENCED | |
| *+ | SB 64 | TELECONFERENCED | |
| + | TELECONFERENCED |
SB 64-RESEARCH AND DEVELOPMENT TAX CREDIT
2:32:07 PM
CHAIR EGAN announced SB 64 to be up for consideration.
CURTIS THAYER, Deputy Commissioner, Department of Commerce,
Community and Economic Development (DCCED), thanked them for
hearing SB 64. It establishes a 20 percent tax credit for
qualified research and development (R&D) conducted by corporate
taxpayers in Alaska. In effect the R&D tax credit would
stimulate private sector investment, entrepreneurial activity
and business expansion in the state while bringing opportunity
and associated long-term benefits to the state's economy. This
legislation will allow Alaska corporations to receive a 20
percent tax credit not to exceed $10 million per taxpayer per
year. The payroll of the employees must take place in Alaska. To
qualify for R&D activities it must meet the following
requirements:
-The purpose is discovering information
-Information technology in nature, the application of which is
intended to be useful in the development of a new or improved
component of the taxpayer; all the activities constitute a
process or experimentation. The experimentation is for
qualifying activity or purpose.
The bill would impose a reporting requirement on the Department
of Revenue so the legislature and the public are aware of the
fiscal impact and the economic benefits of the R&D credit to the
state.
MR. THAYER explained the way the credit would work is that a
percentage of qualified R&D expenditures that exceed the average
qualified R&D expenditures for three years immediately
proceeding that year for which the credit is claimed. Unused
credits will be carried forward for up to seven years after the
expenditure for which the credit is claimed. In order to prevent
a corporate taxpayer from claiming more than one benefit for a
single expenditure, the bill would also provide that a credit
may not be claimed for expenditures that the corporation
deducted in calculating its tax liability or for which it
claimed a federal credit that has been apportioned to Alaska.
Examples of activities that would qualify for these credits are
the development of new and improved product processes and
formulas; development of prototypes for models; building or
improving manufacturing facilities; developing or improving
software technologies; and development or application for
patents. Activities that would not qualify are the exploration
activity to assertion of the existence, location, extent or
quality of any ore or mineral deposit; duplication of existing
business components, surveys or studies such as market research;
advertising. Routine data collection and research into social
sciences, art or humanities would not qualify.
2:36:35 PM
WANETTA AYERS, Director, Division of Economic Development,
Department of Commerce, Community and Economic Development
(DCCED), said she would amplify a couple of points that Mr.
Thayer raised. She reiterated that this is modeled after an
existing federal R&D tax credit that was established in 1981. It
has been reauthorized 14 times and is currently authorized
through 2011. There is a great deal of sentiment on a national
level to have it reauthorized permanently. The Internal Revenue
Code embodies a four-part test to determine what qualifies as
research and development. The activity has to be technological
in nature; there has to be some level of uncertainty, there has
to be a process of experimentation, and it has to be for a
permitted purpose. The idea is that there is some level of
product or process innovation that will lead to newly
commercialized activity or product.
MS. AYERS said on the national level they may be hearing about
the concept of the "innovation agenda." Recently the "America
Competes Act" made a number of changes about how economic
development is addressed on the federal level. Some key
components of this are to accelerate the commercialization of
new technologies, products, process and services. Within EDA
they have established a new Office of Innovation and
Entrepreneurship that is to foster innovation and the
commercialization of new technologies, products, processes and
services with the goal of promoting productivity and economic
growth. She explained that President Obama characterized our
nation's goal is to "out-build, out-innovate and out-education
and out-hustle the rest of the world" so that we would be
economic survivors.
She said that 34 other U.S. states have some form of R&D tax
credit or incentive. They don't want to necessarily "compete
away" R&D activity from them, but to equalize the playing field.
For every $5 increment in R&D expenditures, $1 would be credited
back.
SENATOR PASKVAN said in the last bill with tax credits they
dealt with people from a specific industry, and he didn't see
anyone in the R&D industry asking for this. He asked if they
were working with anyone in particular.
MS. AYERS replied the concept came out of the Council of
Economic Advisors that provides advice to Commissioner Bell and
the department. A number of members have seen the credit work in
other states. A number of businesses could benefit, but they
could not be here today.
2:41:04 PM
JOHANNA BALES, Deputy Director, Tax Division, Department of
Revenue (DOR) said the governor is interested in diversifying
the state's economy and believes this is a step in the right
direction. Maybe in a few years industries will be saying how
great this credit is for them, just like the film incentive.
SENATOR PASKVAN said the other bill had a cap for the incentive,
but he saw $10 million per business here and he wanted to know
the thought process behind it.
MS. BALES responded that the process is different. The Film
Office certifies those expenditures ahead of time and they have
a general idea of what they are looking at to create a cap. When
comparing it to other types of credits, it's very difficult to
pigeonhole R&D expenditures for an entire group of corporate
income taxpayers. For instance, they could cap it and then find
out after three months that they have run out of money; this
type of credit doesn't lend itself to the pre-approval process.
SENATOR PASKVAN said he was trying to get an understanding of
what 20 percent is now and what it would be three years from
now. As he understands it now they get to deduct 100 percent of
their expenditures; so do they get an additional 20 percent
credit?
MS. BALES answered no; if they take the credit they can't also
take the expenditure. They can't get both. She explained that
they are hoping to attract new corporate income tax payers,
because the only time they would get the credit is if the R&D
activity actually increases in the state. So, if you are someone
who is already conducting R&D activity in the state and you
increase it this year, you will get a credit for 20 percent of
that increase. But if you are someone who has never operated
here, your base is going to be zero. So, any new R&D you do, you
would get 20 percent of all expenses.
SENATOR GIESSEL said Ms. Bales frequently talks about
corporations, and asked if this credit would also apply to an
individual.
MS. BALES answered no; just corporations. Individuals don't pay
an income tax in Alaska.
SENATOR GIESSEL said she was thinking about Alaska Aerospace
Corporation that wants to attract some corporations to Alaska to
do some launches. If those corporations are doing some
innovative research, would they qualify for this kind of tax
credit?
MS. BALES answered they may if they meet the qualifications.
2:46:38 PM
SENATOR MENARD said it dawned on her that grandfathering in this
case is a negative, because if a company already invested and is
already going, it won't be given the same credit.
MS. BALES said you could look at it that way, but established
companies have been able to enjoy the federal tax credit which
Alaska does apportion to their corporate income tax. The intent
of this legislation is to increase the activity that is
happening right now, if they can partner with those that are
already here and also bring new industry to Alaska.
2:48:02 PM
SENATOR PASKVAN said he assumed a company doing R&D would be
deducting the payrolls, rents and all their costs on its federal
income taxes, and then they get the credit component. So, if
they can't take the deduction and only take the expense, how
would that work?
MS. BALES explained that in the calculation of state tax, Alaska
starts with federal taxable income. They would be required to
add those expenses back, so it would increase their taxable
income. Then they would be allowed to take a 20 percent credit
but only for those expenses they added back in. So, all of their
R&D expenses would be allowed to be deducted. Depending on the
tax bracket a taxpayer is in and how they are operating, it
might be more beneficial for them to take the deductions and the
federal credit that passes through versus the Alaska credit.
Generally speaking, credits are more favorable because they are
dollar for dollar. She added that Alaska has a 9.4 percent top
corporate income tax rate versus a 20 percent tax credit dollar
per dollar. To be honest, she said, this is a fairly innocuous
credit, and they will see how it works before doing anything
else.
2:50:20 PM
SENATOR MENARD asked what other states do not have a state
income tax.
MS. BALES answered Nevada, Wyoming, Florida, South Dakota and
Washington.
SENATOR GIESSEL asked why the mineral industry gets no credit
for R&D.
MS. BALES explained that this legislation basically piggybacks
the qualifications under federal law and that is stipulated in
federal law.
SENATOR GIESSEL asked how the credits would work with the
petroleum industry and R&D in processing heavy oil since it's an
innovative unknown.
2:53:10 PM
MS. BALES replied if that activity would qualify under federal
law, it would qualify here as well. She said they would like to
present an amendment.
SENATOR PASKVAN said he was still struggling with understanding
the recalculation of gross income under the federal tax,
calculate an Alaska percentage and then apply 20 percent of this
limited number as a credit, and asked if any other state does
that.
MS. BALES replied that the state does this with several other
programs as well; for instance, the education tax credit where
one is also not allowed to take the contribution deduction if
the credit is taken. So, they start with the federal tax and add
back that contribution amount. Then they are allowed to take the
education credit. There are other modifications to federal
taxable income that happen, as well, for differences in federal
and state income tax.
SENATOR PASKVAN said he was still trying to understand what the
numbers would be and what they would mean.
MS. BALES added this is a corporate income tax that is widely
used in most other states. Most corporations are well aware of
it, and that is why they have a large tax staff.
SENATOR PASKVAN said he wanted to know if this promotes the
attorney's industry more than the R&D industry.
MS. BALES explained that it is truly just a line item on a
return that gets added back and recalculated. It is done
frequently and most taxpayers are set up to deal with these
kinds of anomalies.
MS. BALES said she had an amendment that deletes all of (e) on
page 2, lines 12-25 and insert new language.
2:57:41 PM
SENATOR PASKVAN moved to adopt conceptual Amendment 1.
CONCEPTUAL AMENDMENT 1
TO: SB 64
BY: The Department of Revenue
Page 2, line 12: delete "names" insert "number"
Page 2, line 16: after "credit." insert "The
department may only report this information if three
or more taxpayers claimed the credit in the prior
year."
The subsection would then read:
"(e) Each year, the department shall report the number
[NAMES] of taxpayers who claimed credits under this
section in the prior year, the total cumulative amount
of credits granted to all taxpayers under this section
for the prior tax year, and the total cumulative
number of employees conducting the research and
development for which all taxpayers claim the credit.
The department may only report this information if
three or more taxpayers claimed the credit in the
prior year."
SENATOR DAVIS objected for discussion purposes. She asked why
the amendment is needed.
MS. BALES responded that the department does not generally
disclose tax information, especially when talking about R&D
which could be proprietary. Language would also identify
taxpayers and the level of activity they are doing could be
disconcerting and actually make them not want to participate in
this program. The new language would protect that
confidentiality.
CHAIR EGAN said SB 64 would be held for further work.
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