Legislature(2011 - 2012)BELTZ 105 (TSBldg)

02/17/2011 01:30 PM LABOR & COMMERCE

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Heard & Held
Heard & Held
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           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                                                               
-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                                                               
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                                                               
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                                                               
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                                                               
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                                                               
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                                                               
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                                                               
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                                                               
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                                                                    
     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                                                               
CHAIR EGAN said SB 64 would be held for further work.                                                                           

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