SB234 INTR

Senate Bill No. 234

(By Senators Tomblin (Mr. President) and Sprouse

By Request of the Executive)
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[Introduced January 17, 2002; referred to the Committee

Economic Development; and then to the Committee on Finance.]
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A BILL to amend article thirteen-d, chapter eleven of the code of West Virginia, one thousand nine hundred thirty-one, as amended, by adding thereto a new section, designated section ten; and to further amend said chapter by adding thereto two new articles, designated articles thirteen-r and thirteen-s, all relating generally to credits against certain taxes; specifying termination of credits provided in article thirteen-d, chapter eleven of said code; specifying exception for electricity producers; preservation of entitlements; establishing tax credit for manufacturing investment; specifying short title, legislative findings and purpose; definitions; amount of credit allowed for manufacturing investment; specifying procedures for determining qualified manufacturing investment; requiring certain forfeiture of unused tax credits; redetermination of credit allowed; specifying treatment for transfer of property purchased for manufacturing investment to successors; requiring identification of investment credit property; specifying treatment for failure to keep records of property purchased for manufacturing investment; requiring tax credit review and accountability; establishing tax credit for qualified research and development credit; specifying short title, legislative findings and purpose; definitions; specifying annual combined qualified research and development expenditure; qualified research and development expenses; amount of credit allowed; application of credit; requiring certain forfeiture of unused tax credits; redetermination of credit allowed; specifying treatment for transfer of qualified research and development investment to successors; requiring identification of research and development credit property; specifying treatment for failure to keep records of property purchased for research and development investment; requiring tax credit review; and accountability.

Be it enacted by the Legislature of West Virginia:

That article thirteen-d, chapter eleven of the code of West Virginia, one thousand nine hundred thirty-one, as amended, be amended by adding thereto a new section, designated section ten; and that said chapter be further amended by adding thereto two new articles, designated articles thirteen-r and thirteen-s, all to read as follows:
ARTICLE 13D. TAX CREDITS FOR INDUSTRIAL EXPANSION AND
REVITALIZATION, RESEARCH AND DEVELOPMENT
PROJECTS, CERTAIN HOUSING DEVELOPMENT PROJECTS,
MANAGEMENT INFORMATION SERVICES FACILITIES,
INDUSTRIAL FACILITIES PRODUCING COAL-BASED
LIQUIDS USED TO PRODUCE SYNTHETIC FUELS, AND
AEROSPACE INDUSTRIAL FACILITY INVESTMENTS.

§11-13D-10. Termination of credit, exception for electricity producers, preservation of entitlements.

(a) Except for persons taxable under section two-o, article thirteen of this chapter as described in subsection (b) of this section and persons described in subsection (c) of this section, no credit shall be available to any taxpayer under this article subsequent to the thirty-first day of December, two thousand two.

(b) Persons taxable under section two-o, article thirteen of this chapter that make eligible investment that qualifies for credit in accordance with the provisions of subdivision (e), section three of this article in property used in the business activity taxable under section two-o, article thirteen of this chapter, shall be entitled to the credit determined under subdivision (e), section three of this article, in accordance with the requirements and limitations of this article, without regard to whether such investment is made or credit claimed subsequent to the thirty-first day of December, two thousand two.

(c) Taxpayers that gained entitlement to any tax credit pursuant to the terms of this article prior to the first day of January, two thousand three, retain that entitlement, and may apply the credit in due course pursuant to the requirements and limitations of this article until the original ten-year entitlement has been exhausted or otherwise terminated.
ARTICLE 13R. STRATEGIC RESEARCH AND DEVELOPMENT TAX CREDIT.
§11-13R-1. Short title.

This article may be cited as the "West Virginia Strategic Research and Development Tax Credit Act."
§11-13R-2. Legislative finding and purpose.

The Legislature finds that the encouragement of research and development in this state is in the public interest and promotes economic growth and development and the general welfare of the people of this state. In order to encourage research and development in this state and thereby increase employment and economic development, there is hereby provided a strategic research and development tax credit.
§11-13R-3. Definitions.

(a) General. -- When used in this article, or in the administration of this article, terms defined in subsection (b) of this section shall have the meanings ascribed to them by this section, unless a different meaning is clearly required by either the context in which the term is used, or by specific definition, in this article.

(b) Terms defined.

(1) "Base amount" means the average annual combined qualified research and development expenditure for the three taxable years immediately preceding the taxable year for which a credit is claimed under this article; or

(A) For a taxpayer that has filed a tax return under article twenty-three of this chapter for fewer than three but at least one prior taxable year, determined on the basis of all filings by the taxpayer's controlled group, the base amount is the average annual combined qualified research and development expenditure for the number of immediately preceding taxable years, other than short taxable years, during which the taxpayer has filed a tax return under article twenty-three of this chapter.

(B) For a taxpayer that has not filed a tax return under article twenty-three of this chapter for at least one taxable year, determined on the basis of all filings by the taxpayer's controlled group, the base amount is zero.

(2) "Commissioner" and "tax commissioner" are used interchangeably herein and mean the tax commissioner of the state of West Virginia, or his or her delegate.

(3) "Controlled group" means a controlled group as defined by section 1563 of the Internal Revenue Code of 1986, as amended.

(4) "Corporation" means any corporation, limited liability company, joint-stock company or association, and any business conducted by a trustee or trustees wherein interest or ownership is evidenced by a certificate of interest or ownership or similar written instrument.

(5) "Delegate" in the phrase "or his or her delegate," when used in reference to the tax commissioner, means any officer or employee of the state tax division of the department of tax and revenue duly authorized by the tax commissioner directly, or indirectly by one or more redelegations of authority, to perform the functions mentioned or described in this article.

(6) "Eligible taxpayer" means any person that is subject to the tax imposed by article twenty-three or article twenty-four of this chapter that is engaged in qualified research and development that has paid or incurred investment in qualified research and development credit property or that has paid or incurred qualified research and development expenses as defined in section four of this article. In the case of a sole proprietorship subject to neither the tax imposed by article twenty-three nor the tax imposed by article twenty-four, the term "eligible taxpayer" means any sole proprietor who is subject to the tax imposed by article twenty-one of this chapter and who is engaged in qualified research and development that has paid or incurred investment in qualified research and development credit property or that has paid or incurred qualified research and development expenses as defined in section four of this article.

(7) "Partnership" includes a syndicate, group, pool, joint venture or other unincorporated organization through or by means of which any business, financial operation or venture is carried on, and which is not a trust or estate, a corporation or a sole proprietorship. The term "partner" includes a member in such a syndicate, group, pool, joint venture or organization.

(8) "Person" includes any natural person, corporation, limited liability company or partnership.

(9) "Qualified research and development credit property" means depreciable property purchased for the conduct of qualified research and development.

(10) "Research and development" means systematic scientific, engineering or technological study and investigation in a field of knowledge in the physical, computer or software sciences, often involving the formulation of hypotheses and experimentation, for the purpose of revealing new facts, theories or principles, or increasing scientific knowledge, which may reveal the basis for new or enhanced products, equipment or manufacturing processes.

(A) Research and development includes, but is not limited to, design, refinement and testing of prototypes of new or improved products, or design, refinement and testing of manufacturing processes before commercial sales relating thereto have begun. For purposes of this section, commercial sales includes, but is not limited to, sales of prototypes or sales for market testing.

(B) Research and development does not include:

(i) Market research;

(ii) Sales research;

(iii) Efficiency surveys;

(iv) Consumer surveys;

(v) Product market testing;

(vi) Product testing by product consumers or through consumer surveys for evaluation of consumer product performance or consumer product usability;

(vii) The ordinary testing or inspection of materials or products for quality control (quality control testing);

(viii) Management studies;

(ix) Advertising;

(x) Promotions;

(xi) The acquisition of another's patent, model, production or process or investigation or evaluation of the value or investment potential related thereto;

(xii) Research in connection with literary, historical or similar activities;

(xiii) Research in the social sciences, economics, humanities or psychology and other non-technical activities; and

(xiv) The providing of sales services or any other service, whether technical service or non-technical service.

(11) "Related person" means:

(A) A corporation, limited liability company, partnership, association or trust controlled by the taxpayer;

(B) An individual, corporation, limited liability company, partnership, association or trust that is in control of the taxpayer;

(C) A corporation, limited liability company, partnership, association or trust controlled by an individual, corporation, partnership, association or trust that is in control of the taxpayer; or

(D) A member of the same controlled group as the taxpayer.

For purposes of this article, "control," with respect to a corporation, means ownership, directly or indirectly, of stock possessing fifty percent or more of the total combined voting power of all classes of the stock of such corporation entitled to vote. "Control," with respect to a trust, means ownership, directly or indirectly, of fifty percent or more of the beneficial interest in the principal or income of such trust. The ownership of stock in a corporation, of a capital or profits interest in a partnership or association or of a beneficial interest in a trust shall be determined in accordance with the rules for constructive ownership of stock provided in section 267(c) of the United States Internal Revenue Code of 1986, as amended, other than paragraph (3) of such section.

(12) "Taxpayer" means any person subject to the tax imposed by article twenty-three or twenty-four of this chapter or both. In the case of a sole proprietorship subject to neither the tax imposed by article twenty-three nor the tax imposed by article twenty-four, the term "taxpayer" means any sole proprietor who is subject to the tax imposed by article twenty-one of this chapter.

(13) "This code" means the code of West Virginia, one thousand nine hundred thirty-one, as amended.

(14) "This state" means the state of West Virginia.

§11-13R-4. Annual combined qualified research and development expenditure, qualified research and development expenses.

(a) General. -- The annual combined qualified research and development expenditure is the sum of the applicable percentage of the cost of depreciable property purchased for the conduct of a qualified research and development activity, which is placed in service or use in this state during the taxable year, plus the amount of qualified research and development expenses (as defined in this section) deducted by the eligible taxpayer, for federal income tax purposes for the taxable year.

(b) Applicable percentage of the cost of depreciable property. -- For the purpose of subsection (a), the applicable percentage of the cost of depreciable property shall be determined under the following table:
If useful life is:

The applicable percentage is:

Less than 4 years ...........................33 1/3

4 years or more but less than 6 years .......66 2/3

6 years or more .............................100

The useful life of any property for purposes of this section shall be determined pursuant to such methods as the tax commissioner may require as of the date such property is first placed in service or use in this state by the taxpayer.

(c) Placed in service or use. -- For purposes of the credit allowed by this article, property shall be considered placed in service or use in the earlier of the following taxable years:

(1) The taxable year in which, under the taxpayer's depreciation practice, the period for depreciation with respect to such property begins; or

(2) The taxable year in which the property is placed in a condition or state of readiness and availability for a specifically assigned function.

(d) Cost of property. -- For purposes of subsection (a) of this section, the cost of each property purchased for the conduct of a qualified research and development activity shall be determined under the following rules:

(1) Trade-ins. -- Cost shall not include the value of property given in trade or exchange for the property purchased for conduct of the research and development activity.

(2) Damaged, destroyed or stolen property. -- If property is damaged or destroyed by fire, flood, storm or other casualty, or is stolen, then the cost of replacement property shall not include any insurance proceeds received in compensation for the loss.

(3) Rental property. -- The cost of property acquired by lease for a term of ten years or longer shall be one hundred percent of the rent reserved for the primary term of the lease, not to exceed twenty years.

(4) Property purchased for multiple use. -- The cost of property purchased for multiple business use, including direct use in the conduct of a qualified research and development activity, together with some other business or activity not eligible under this section, shall be apportioned between such activities. The amount apportioned to the conduct of the qualified research and development activity shall be considered to be eligible investment subject to the conditions and limitations of this section.

(5) Self-constructed property. -- In the case of self-constructed property, the cost thereof shall be the amount properly charged to the capital account for depreciation in accordance with federal income tax law.

(e) Qualified research and development expenses. -- For purposes of this section:

(1) "Qualified research and development expenses" means the sum of in-house and contract research and development expenses for qualified research and development allocated to this state, which are paid or incurred by the eligible taxpayer during the taxable year. In no event shall "qualified research and development expenses" include:

(A) Any expense that must be capitalized and depreciated for federal income tax purposes, or any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent or quality of any deposit of coal, limestone or other natural resource, including oil and natural gas, or

(B) Any wage or salary expense for wages or salary reported on form W-2 for federal income tax purposes on which the personal income tax is imposed under article twenty-one of this chapter, and against which tax the credit allowed under this article is applied.

(2) "In-house research and development expenses" means:

(A) Wages paid or incurred to an employee for qualified services performed in this state by such employee;

(B) Amounts paid or incurred for supplies used in the conduct of qualified research and development in this state; and

(C) Amounts paid or incurred to another person for the right to use personal property in the conduct of qualified research and development in this state.

(3) "Qualified services" means services consisting of:

(A) Engaging in qualified research and development; or

(B) Engaging in the direct supervision or direct support of qualified research and development;

(C) If substantially all of the services performed by an individual for the taxpayer during the taxable year consist of services meeting the requirements of subparagraph (A) or (B) above, the term "qualified services" means all services performed by such individual for the taxable year;

(4) "Supplies" means any tangible property other than:

(A) Land or improvements to land; and

(B) Property of a character subject to depreciation for federal income tax purposes.

(5) "Wages" has the meaning given to such term by section 3401(a) of the Internal Revenue Code of 1986, as amended. In the case of self-employed individuals and owner-employees (within the meaning of section 401(c)(1) of said Internal Revenue Code), the term "wages" includes the earned income (as defined in section 401(c)(2) of said Internal Revenue Code) of such employee. The term "wages" shall not include any amount taken into account in determining the federal targeted jobs credit under section 51(a) of said Internal Revenue Code.

(6) "Contract research and development expenses" means:

(A) In general, sixty-five percent of any amount paid or incurred by the taxpayer to any person (other than an employee of the taxpayer) for qualified research and development;

(B) If any contract research and development expenses paid or incurred during any taxable year are attributable to qualified research and development to be conducted after the close of the taxable year, such amount shall be treated as paid or incurred during the taxable year during which the qualified research and development is conducted.

(7) "Qualified research and development" means research and development that occurs in West Virginia.

(8) Excluded property. -- Any property owned or leased by the taxpayer, the cost of which was the basis of a credit against tax taken under any other article of this chapter, shall not qualify as property purchased for the conduct of a qualified research and development activity for purposes of this article.

(9) Excluded expense. -- Any expense paid or incurred by the taxpayer, which was the basis of a credit against tax taken under any other article of this chapter, shall not qualify as a qualified research and development expense for purposes of this article.

(f) Research and development by colleges, universities and certain research and development organizations. -- In general, sixty-five percent of the amount paid or incurred by a taxpayer to a research institution as defined in this section for research and development to be performed by such research institution shall be treated as contract research and development expenses. The preceding sentence shall apply only if the amount is paid or incurred pursuant to a written research and development agreement between the taxpayer and the research institution.

For purposes of this section, the term "research institution" means any nonprofit educational organization which is an institution of higher education (as defined in section 3304(f) of the Internal Revenue Code of 1986, as amended), a West Virginia institution of higher education subject to the jurisdiction of a board described in section one, article one, chapter eighteen-b of this code, or any other nonprofit organization exempt from federal income taxes which is organized and operated primarily to conduct scientific research and is not a private foundation for federal income tax purposes.

(g) Standards for determining qualified research and development expenses. -- In prescribing standards for determining which research and development expenses are considered to be qualified research and development expenses for purposes of this section, the tax commissioner may consider: (1) The place where the services are performed; (2) the residence or business location of the person or persons performing the services; (3) the place where research and development supplies are consumed; and (4) other factors that the tax commissioner believes relevant in determining whether or not the research and development expenses were made for qualified research and development, and depreciable property was purchased and used for qualified research and development, during the taxable year

(h) Depreciable property. -- Purchases of depreciable property for the conduct of qualified research shall qualify as part of the annual combined qualified research and development expenditure for purposes of this article only if:

(1) The property is not acquired from a person whose relationship to the person acquiring it would result in the disallowance of deductions under section 267 or 707(b) of the United States Internal Revenue Code of 1986, as amended.

(2) The property is not acquired from a related person or by one component member of a controlled group from another component member of the same controlled group. The tax commissioner may waive this requirement if the property was acquired from a related party for its then fair market value; and

(3) The basis of the property for federal income tax purposes, in the hands of the person acquiring it, is not determined:

(A) In whole or in part by reference to the federal adjusted basis of such property in the hands of the person from whom it was acquired; or

(B) Under section 1014(e) of the United States Internal Revenue Code of 1986, as amended.
§11-13R-5. Amount of credit allowed.

The allowable credit shall be the greater of:

(1) Three percent of the annual combined qualified research and development expenditure, or

(2) Ten percent of the excess of the annual combined qualified research and development expenditure over the base amount.
§11-13R-6. Application of credit.

(a) Credit allowed. -- Beginning in the year that the annual combined qualified research and development expenditure is paid or incurred, eligible taxpayers and owners of eligible taxpayers described in subsections (d) and (f) of this section shall be allowed a credit against the taxes imposed by articles twenty-three, twenty-four and twenty-one of this chapter, in that order, as specified in this section.

(b) Business franchise tax. -- The credit shall first be applied to reduce the taxes imposed by article twenty-three of this chapter for the taxable year (determined after application of the credits against tax provided in section seventeen of said article, but before application of any other allowable credits against tax).

(c) Corporation net income taxes. -- After application of subsection (b) of this section, any unused credit shall next be applied to reduce the taxes imposed by article twenty-four of this chapter for the taxable year (determined before application of allowable credits against tax).

(d) If the eligible taxpayer is a limited liability company, small business corporation, or a partnership, then any unused credit (after application of subsections (b) and (c) of this section) shall be allowed as a credit against the taxes imposed by article twenty-four of this chapter on owners of the eligible taxpayer on the conduit income directly derived from the eligible taxpayer by its owners. Only those portions of the tax imposed by article twenty-four of this chapter that are imposed on income directly derived by the owner from the eligible taxpayer are subject to offset by this credit:

(1) Small business corporations, limited liability companies, partnerships and other unincorporated organizations shall allocate the credit allowed by this article among their members in the same manner as profits and losses are allocated for the taxable year;

(2) No credit shall be allowed under this article against any withholding tax imposed by, or payable under, article twenty-one of this chapter.

(e) Personal income tax taxes. -- After application of subsections (b), (c) and (d) of this section, any unused credit shall next be applied to reduce the taxes imposed by article twenty-one of this chapter for the taxable year (determined before application of allowable credits against tax) of the eligible taxpayer.

(f) If the eligible taxpayer is a limited liability company, small business corporation, or a partnership, then any unused credit (after application of subsections (b), (c), (d) and (e) of this section) shall be allowed as a credit against the taxes imposed by article twenty-one of this chapter on owners of the eligible taxpayer on the conduit income directly derived from the eligible taxpayer by its owners. Only those portions of the tax imposed by article twenty-one of this chapter that are imposed on income directly derived by the owner from the eligible taxpayer are subject to offset by this credit:

(2) No credit shall be allowed under this article against any withholding tax imposed by, or payable under, article twenty-one of this chapter.

(g) The total amount of tax credit that may be used in any taxable year by any eligible taxpayer in combination with the owners of the eligible taxpayer under subsections (d) and (f) of this section may not exceed two million dollars.

(h) Unused credit carry forward. -- If the credit allowed under this article in any taxable year exceeds the sum of the taxes enumerated in subsections (b), (c), (d), (e) and (f) of this section for that taxable year, the eligible taxpayer and owners of eligible taxpayers described in subsections (d) and (f) of this section may apply the excess as a credit against those said taxes, in the order and manner stated in this section, for succeeding taxable years until the earlier of the following:

(1) The full amount of the excess credit is used; or

(2) The expiration of the tenth taxable year after the taxable year in which the annual combined qualified research and development expenditure was paid or incurred. Credit remaining thereafter is forfeited.

(i) Application for certification. -- No credit shall be allowed or applied under this article until the person seeking to claim the credit has filed a written application for certification of the proposed research and development program or project with the tax commissioner, and has received certification of the research and development program or project from the tax commissioner pursuant to that written application. The certification of the program or project must be received by the eligible taxpayer from the tax commissioner prior to any credit being claimed or allowed for any annual combined qualified research and development expenditure for any research activity or project:

(1) In the case of owners of eligible taxpayers described in subsections (d) or (f) of this section, the application for certification filed under this section by the limited liability company, small business corporation or partnership owned by such person is considered to be filed on behalf of the owner, and no separate filing of the application is required of such owner;

(2) Form of application. -- The application for certification shall be filed in such form as the tax commissioner may prescribe, and shall contain such information as the tax commissioner may require, to determine whether the project should be certified as eligible for credit under this article;

(3) Time period covered by certification. -- The application may request certification of the research and development program for one taxable year or multiple taxable years, as applicable, based on the nature and character of the program or project plan for the particular research and development project or activity;

(4) Requirements for application. -- The application shall specifically set forth a written research and development program plan generally describing the nature of the research and development to be undertaken, the projected time period over which the research and development shall be carried out, the period of time for which the applicant seeks certification of the program or project, and such other information as the tax commissioner may require;

(5) Certification. -- The tax commissioner may issue certification of a research and development program or project if it appears to the tax commissioner that the applicant intends to engage in a bona fide research and development activity, as described in this article, and will otherwise comply with the requirements of this article and all rules and requirements applicable thereto;

(6) Time period covered by certification. -- The tax commissioner may issue certification for the period of time for which the eligible taxpayer seeks certification, or a different period of time, within the discretion of the tax commissioner. In his or her discretion, the tax commissioner may require that a separate application be filed for each tax year in which qualified research and development activity is to be undertaken or in which qualified research and development property is to be placed in service or use;

(7) Failure to file. -- The failure to timely file the application for certification of a research and development program or project under this section shall result in forfeiture of one hundred percent of the annual credit otherwise allowable under this article. This penalty shall apply annually until such application is filed;

(8) Research and development undertaken without certification. -- If a person has filed an application for certification of a research and development program or project, and has failed to receive certification of the plan or program from the tax commissioner, no credit shall be allowed under this article for such research and development activity or investment relating thereto;

(9) Failure to comply with terms of certification. -- If a person has filed an application for certification of a research and development program or project, and has received certification of the plan or program from the tax commissioner, but fails to conform to the terms of the certification, no credit shall be allowed under this article for such research and development activity or for investment in such research and development activity by the eligible taxpayer. This restriction may be waived by the tax commissioner upon a finding that the research and development thus undertaken was within the requirements of this article, and that there was no intent to defraud the state or willful neglect in the applicant's failure to conform to the terms of the certification;

(10) Failure to comply with certification time restrictions. -- If a person has filed an application for certification of a research and development program or project, and has received certification of the plan or program from the tax commissioner, but fails to conform to the time periods specified therein for the certified research and development program or project, or fails to renew the certification so as to cover ongoing or subsequent research and development activity, the research and development activity shall be considered to be out of compliance with the terms of the certification, and no credit shall be allowed under this article for, or relating to, such research and development activity by any person or taxpayer. This restriction may be waived by the tax commissioner upon a finding that the research and development thus undertaken was within the requirements of this article, and that there was no intent to defraud the state or willful neglect in the applicant's failure to conform to the terms of the certification.

§11-13R-7. Forfeiture of unused tax credits; redetermination of credit allowed.

(a) Disposition of property or cessation of use. -- If during any taxable year, property with respect to which a tax credit has been allowed under this article:

(1) Is disposed of prior to the end of its useful life, as determined under section four of this article; or

(2) Ceases to be used in a qualified research and development activity of the taxpayer in this state prior to the end of its useful life, as determined under said section four, then the unused portion of the credit allowed for such property shall be forfeited for the taxable year and all ensuing years. Except when the property is damaged or destroyed by fire, flood, storm or other casualty, or is stolen, the taxpayer shall redetermine the amount of credit allowed in all earlier years by reducing the applicable percentage of cost of such property allowed under said section four, to correspond with the percentage of cost allowable for the period of time that the property was actually used in the qualified research and development activity of the taxpayer. The taxpayer shall then file a reconciliation statement with its annual return filed under article twenty-three of this chapter, for the year in which the forfeiture occurs and pay any additional taxes owed due to reduction of the amount of credit allowable for such earlier years, plus interest and any applicable penalties.

§11-13R-8. Transfer of qualified research and development investment to successors.

(a) Mere change in form of business. -- Property may not be treated as disposed of under section seven of this article, by reason of a mere change in the form of conducting the business as long as the property is retained in a business in this state for use in qualified research and development, and the taxpayer retains a controlling interest in the successor business. In this event, the successor business shall be allowed to claim the amount of credit still available with respect to the property transferred, and the taxpayer (transferor) may not be required to redetermine the amount of credit allowed in earlier years.

(b) Transfer or sale to successor. -- Property may not be treated as disposed of under section seven of this article by reason of any transfer or sale to a successor business which continues to use the property in qualified research and development. Upon transfer or sale, the successor shall acquire the amount of credit that remains available under this article for each subsequent taxable year, and the taxpayer (transferor) may not be required to redetermine the amount of credit allowed in earlier years.
§11-13R-9. Identification of investment credit property.

Every taxpayer who claims credit under this article shall maintain sufficient records to establish the following facts for each item of qualified research and development property:

(1) Its identity;

(2) Its actual or reasonably determined cost;

(3) Its straight-line depreciation life;

(4) The month and taxable year in which it was placed in service;

(5) The amount of credit taken; and

(6) The date it was disposed of or otherwise ceased to be qualified research and development property.

§11-13R-10. Failure to keep records of qualified research and development credit property.

A taxpayer who does not keep the records required for identification of qualified research and development credit property, is subject to the following rules:

(1) A taxpayer shall be treated as having disposed of, during the taxable year, any qualified research and development credit property which the taxpayer cannot establish was still on hand and used in qualified research and development activity at the end of that year.

(2) If a taxpayer cannot establish when qualified research and development credit property reported for purposes of claiming this credit returned during the taxable year was placed in service, the taxpayer shall be treated as having placed it in service in the most recent prior year in which similar property was placed in service, unless the taxpayer can establish that the property placed in service in the most recent year is still on hand and used in qualified research and development activity at the end of that year. In that event, the taxpayer will be treated as having placed the returned property in service in the next most recent year.
§11-13R-11. Tax credit review and accountability.

(a) Beginning on the first day of February, two thousand six and on the first day of February every third year thereafter, the commissioner shall submit to the governor, the president of the Senate and the speaker of the House of Delegates a tax credit review and accountability report evaluating the cost effectiveness of the credit allowed under this article during the preceding three-year period. The criteria to be evaluated shall include, but not be limited to, for each year of the three-year period:

(1) The numbers of taxpayers claiming the credit;

(2) The net number of new jobs created by all taxpayers claiming the credit;

(3) The cost of the credit;

(4) The cost of the credit per new job created;

(5) Comparison of employment trends for an industry and for taxpayers within the industry that claim the credit.

(b) Taxpayers claiming the credit shall provide such information as the tax commissioner may require to prepare the report: Provided, That such information shall be subject to the confidentiality and disclosure provisions of sections five-d and five-s, article ten of this chapter of this code.
ARTICLE 13S. MANUFACTURING INVESTMENT TAX CREDIT.
§11-13S-1. Short title.

This article may be cited as the "West Virginia Manufacturing Investment Tax Credit Act."
§11-13S-2. Legislative findings and purpose.

The Legislature finds that the encouragement of the location of new industry in this state, and the expansion, growth and revitalization of existing industrial facilities in this state is in the public interest and promotes the general welfare of the people of this state.
§11-13S-3. Definitions.

(a) Any term used in this article shall have the meaning ascribed by this section, unless a different meaning is clearly required by the context of its use or by definition in this article.

(b) For purpose of this article, the term:

(1) "Eligible taxpayer" means an industrial taxpayer who purchases new property for the purpose of industrial expansion, or for the purpose of industrial revitalization of an existing industrial facility in this state.

(2) "Industrial expansion" means capital investment in a new or expanded industrial facility in this state.

(3) "Industrial facility" means any factory, mill, plant, refinery, warehouse, building or complex of buildings located within this state, including the land on which it is located, and all machinery, equipment and other real and tangible personal property located at or within such facility primarily used in connection with the operation of such manufacturing business.

(4) "Industrial revitalization" or "revitalization" means capital investment in an industrial facility located in this state to replace or modernize buildings, equipment, machinery and other tangible personal property used in connection with the operation of such facility in an industrial business of the taxpayer, including the acquisition of any real property necessary to the industrial revitalization.

(5) "Industrial taxpayer" means any person subject to the tax imposed by article twenty-three of this chapter that is primarily engaged in a manufacturing business.

(6) "Manufacturing" means any business activity classified as having a sector identifier, consisting of the first two digits of the six-digit North American Industry Classification System code number, of thirty-one, thirty-two or thirty-three.

(7) "Property purchased for manufacturing investment" means real property, and improvements thereto, and tangible personal property, but only if such property was constructed, or purchased, on or after the first day of January, two thousand three, for use as a component part of a new, expanded or revitalized industrial facility. This term includes only that tangible personal property with respect to which depreciation, or amortization in lieu of depreciation, is allowable in determining the federal income tax liability of the industrial taxpayer, that has a useful life, at the time such property is placed in service or use in this state, of four years or more. Property acquired by written lease, for a primary term of ten years or longer, if used as a component part of a new or expanded industrial facility, shall be included within this definition.

(A) "Property purchased for manufacturing investment" does not include:

(i) Repair costs including materials used in the repair, unless for federal income tax purposes, the cost of the repair must be capitalized and not expensed;

(ii) Motor vehicles licensed by the department of motor vehicles;

(iii) Airplanes;

(iv) Off-premises transportation equipment;

(v) Property which is primarily used outside this state; and

(vi) Property which is acquired incident to the purchase of the stock or assets of an industrial taxpayer, which property was or had been used by the seller in his or her industrial business in this state, or in which investment was previously the basis of a credit against tax taken under any other article of this chapter.

(B) Purchases or acquisitions of land or depreciable property shall qualify as purchases of property purchased for manufacturing investment for purposes of this article only if:

(i) The property is not acquired from a person whose relationship to the person acquiring it would result in the disallowance of deductions under section 267 or 707(b) of the United States Internal Revenue Code of 1986, as amended;

(ii) The property is not acquired from a related person or by one component member of a controlled group from another component member of the same controlled group. The tax commissioner may waive this requirement if the property was acquired from a related party for its then fair market value; and

(iii) The basis of the property for federal income tax purposes, in the hands of the person acquiring it, is not determined, in whole or in part, by reference to the federal adjusted basis of such property in the hands of the person from whom it was acquired; or under Section 1014(e) of the United States Internal Revenue Code of 1986, as amended.

(9) "Qualified manufacturing investment" means that amount determined under section five of this article as qualified manufacturing investment.

(10) "Taxpayer" means any person taxable under article twenty-three of this chapter.
§11-13S-4. Amount of credit allowed for manufacturing investment.

(a) Credit allowed. -- There shall be allowed to eligible taxpayers and to persons described in subdivision (5), subsection (b) of this section, a credit against the taxes imposed by articles thirteen-a, twenty-three and twenty-four of this chapter. The amount of credit shall be determined as hereinafter provided in this section.

(b) Amount of credit allowable. -- The amount of allowable credit under this article shall be equal to five percent of the qualified manufacturing investment (as determined in section five of this article), and shall reduce the severance tax, imposed under article thirteen-a of this chapter, the business franchise tax imposed under article twenty-three of this chapter and the corporation net income tax imposed under article twenty- four of this chapter, in that order, subject to the following conditions and limitations:

(1) The amount of credit allowable shall be applied over a ten-year period, at the rate of one-tenth thereof per taxable year, beginning with the taxable year in which the property purchased for manufacturing investment is first placed in service or use in this state;

(2) Severance tax. -- The credit shall first be applied to reduce the severance tax, imposed under article thirteen-a of this chapter (determined before application of the credit allowed by section three, article twelve-b of this chapter and before any other allowable credits against tax and before application of the annual exemption allowed by section ten of said article thirteen-a). The amount of annual credit allowed shall not reduce the severance tax, imposed under article thirteen-a of this chapter, below fifty percent of the amount which would be imposed for such taxable year in the absence of this credit against tax, determined as aforesaid. When in any taxable year the taxpayer is entitled to claim credit under this article and article thirteen-d of this chapter, the total amount of all such credits allowable for the taxable year may not reduce the amount of the severance tax, imposed under article thirteen-a of this chapter, below fifty percent of the amount which would be imposed for such taxable year (determined before application of the credit allowed by section three, article twelve-b of this chapter and before any other allowable credits against tax and before application of the annual exemption allowed by section ten of the said article thirteen-a);

(3) Business franchise tax. -- After application of subdivision (2) of this subsection (b), any unused credit shall next be applied to reduce the business franchise tax, imposed under article twenty-three of this chapter (determined after application of the credits against tax provided in section seventeen of said article, but before application of any other allowable credits against tax). The amount of annual credit allowed will not reduce the business franchise tax imposed under article twenty-three of this chapter, below fifty percent of the amount which would be imposed for such taxable year in the absence of this credit against tax, determined as aforesaid. When in any taxable year the taxpayer is entitled to claim credit under this article and article thirteen-d of this chapter, the total amount of all such credits allowable for the taxable year will not reduce the amount the business franchise tax, imposed under article twenty-three of this chapter, below fifty percent of the amount which would be imposed for such taxable year (determined after application of the credits against tax provided in section seventeen of said article, but before application of any other allowable credits against tax);

(4) Corporation net income tax. -- After application of subdivision (3) of this subsection (b), any unused credit shall next be applied to reduce the corporation net income tax, imposed under article twenty-four of this chapter (determined before application of any other allowable credits against tax). The amount of annual credit allowed shall not reduce corporation net income tax imposed under article twenty-four of this chapter, below fifty percent of the amount which would be imposed for such taxable year in the absence of this credit against tax, determined as aforesaid. When in any taxable year the taxpayer is entitled to claim credit under this article and article thirteen-d of this chapter, the total amount of all such credits allowable for the taxable year shall not reduce the amount the corporation net income tax, imposed under article twenty-four of this chapter, below fifty percent of the amount which would be imposed for such taxable year (determined before application of any other allowable credits against tax).

(5) Pass-through entities. --

(A) If the eligible taxpayer is a limited liability company, small business corporation, or a partnership, then any unused credit (after application of subdivisions (2), (3) and (4) of this subsection (b)) shall be allowed as a credit against the taxes imposed by article twenty-four of this chapter on owners of the eligible taxpayer on the conduit income directly derived from the eligible taxpayer by its owners. Only those portions of the tax imposed by article twenty-four of this chapter that are imposed on income directly derived by the owner from the eligible taxpayer are subject to offset by this credit.

(B) The amount of annual credit allowed will not reduce corporation net income tax imposed under article twenty-four of this chapter, below fifty percent of the amount which would be imposed on the conduit income directly derived from the eligible taxpayer by each owner for such taxable year in the absence of this credit against tax against the taxes (determined before application of any other allowable credits against tax).

(C) When in any taxable year the taxpayer is entitled to claim credit under this article and article thirteen-d of this chapter, the total amount of all such credits allowable for the taxable year will not reduce the corporation net income tax imposed on the conduit income directly derived from the eligible taxpayer by each owner, below fifty percent of the amount that would be imposed for such taxable year on such conduit income (determined before application of any other allowable credits against tax).

(6) Small business corporations, limited liability companies, partnerships and other unincorporated organizations shall allocate any unused credit (after application of subdivisions (2), (3) and (4) of this subsection (b)) among their members in the same manner as profits and losses are allocated for the taxable year.

(7) No credit shall be allowed under this article against any tax imposed by article twenty-one of this chapter.

(c) No carryover to a subsequent taxable year or carryback to a prior taxable year shall be allowed for the amount of any unused portion of any annual credit allowance. Such unused credit shall be forfeited.

(d) Application for credit required. -- (1) Application required. - No credit shall be allowed or applied under this article for any manufacturing investment until the eligible taxpayer makes written application to the tax commissioner for allowance of credit as provided in this section. An application for credit shall be filed, in such form as the tax commissioner shall prescribe, prior to the first date when qualified investment property is first placed in service or use. All information required by such form is provided. A separate application shall be filed for each tax year in which property purchased for manufacturing investment is placed in service or use.

(2) Failure to file. -- The failure to timely apply the application for credit under this section shall result in forfeiture of fifty percent of the annual credit allowance otherwise allowable under this article. This penalty shall apply annually until such application is filed.
§11-13S-5. Qualified manufacturing investment.

(a) General. -- The qualified manufacturing investment shall be the applicable percentage of the cost of property purchased for manufacturing investment, which is placed in service or use in this state, by the eligible taxpayer during the taxable year.

(b) Applicable percentage. -- For the purposes of subsection (a) above, the applicable percentage for any property shall be determined under the following table:

If useful life is:

The applicable percentage is:

4 years or more but less than 6 years ...........33 1/3

6 years or more but less than 8 years ...........66 2/3

8 years or more .................................100

The useful life of any property for purposes of this section is determined pursuant to such methods as the tax commissioner may require as of the date such property is first placed in service or use in this state by the taxpayer, determined as the tax commissioner may require.

(c) Placed in service or use. -- For purposes of the credit allowed by this article, property shall be considered placed in service or use in the earlier of the following taxable years:

(1) The taxable year in which, under the taxpayer's depreciation practice, the period for depreciation with respect to such property begins; or

(2) The taxable year in which the property is placed in a condition or state of readiness and availability for a specifically assigned function.

(d) Cost. -- For purposes of this section, the cost of property purchased for manufacturing investment, are determined under the following rules:

(1) Trade-ins. -- Cost will not include the value of property given in trade or exchange for property purchased for manufacturing investment;

(2) Damaged, destroyed or stolen property. -- If property is damaged or destroyed by fire, flood, storm or other casualty, or is stolen, then the cost of replacement property will not include any insurance proceeds received in compensation for the loss;

(3) Rental property. -- The cost of property acquired by lease for a term of ten years or longer is one hundred percent of the rent reserved for the primary term of the lease, not to exceed twenty years;

(4) Property purchased for multiple use. -- The cost of property purchased for multiple business use including use as a component part of a new or expanded or revitalized industrial facility, together with some other business or activity not eligible for credit under this article, shall be apportioned between such businesses and occupations. The amount apportioned to the new or expanded or revitalized industrial facility is considered as a qualified investment, subject to the conditions and limitations of this section;

(5) Self-constructed property. -- In the case of self-constructed property, the cost thereof shall be the amount properly charged to the capital account for purposes of depreciation.

§11-13S-6. Forfeiture of unused tax credits; redetermination of credit allowed.

(a) Disposition of property or cessation of use. -- If during any taxable year, property with respect to which a tax credit has been allowed under this article:

(1) Is disposed of prior to the end of its useful life, as determined under section five of this article; or

(2) Ceases to be used in an industrial facility of the taxpayer in this state prior to the end of its useful life, as determined under said section five, then the unused portion of the credit allowed for such property is forfeited for the taxable year and all ensuing years. Except when the property is damaged or destroyed by fire, flood, storm or other casualty, or is stolen, the taxpayer shall redetermine the amount of credit allowed in all earlier years by reducing the applicable percentage of cost of such property allowed under said section five, to correspond with the percentage of cost allowable for the period of time that the property was actually used in manufacturing activity as part of an industrial facility of the taxpayer. The taxpayer shall then file a reconciliation statement with its annual return filed under article twenty- three of this chapter, for the year in which the forfeiture occurs and pay any additional taxes owed due to reduction of the amount of credit allowable for such earlier years, plus interest and any applicable penalties.

§11-13S-7. Transfer of property purchased for manufacturing investment to successors.

(a) Mere change in form of business. -- Property may not be treated as disposed of under section six of this article, by reason of a mere change in the form of conducting the business as long as the property is retained in a business in this state for use in the activity of manufacturing in an industrial facility in West Virginia, and the taxpayer retains a controlling interest in the successor business. In this event, the successor business is allowed to claim the amount of credit still available with respect to the property or industrial facility transferred, and the taxpayer (transferor) may not be required to redetermine the amount of credit allowed in earlier years.

(b) Transfer or sale to successor. -- Property will not be treated as disposed of under section six of this article by reason of any transfer or sale to a successor business which continues to use the property in manufacturing in an industrial facility in West Virginia. Upon transfer or sale, the successor shall acquire the amount of credit that remains available under this article for each subsequent taxable year, and the taxpayer (transferor) shall not be required to redetermine the amount of credit allowed in earlier years.
§11-13S-8. Identification of investment credit property.

Every taxpayer who claims credit under this article shall maintain sufficient records to establish the following facts for each item of property purchased for manufacturing investment:

(1) Its identity;

(2) Its actual or reasonably determined cost;

(3) Its straight-line depreciation life;

(4) The month and taxable year in which it was placed in service;

(5) The amount of credit taken; and

(6) The date it was disposed of or otherwise ceased to be qualified research and development property.

§11-13S-9. Failure to keep records of property purchased for manufacturing investment.

A taxpayer who does not keep the records required for property purchased for manufacturing investment, is subject to the following rules:

(1) A taxpayer shall be treated as having disposed of, during the taxable year, any property purchased for manufacturing investment which the taxpayer cannot establish was still on hand and used in manufacturing activity in this state at the end of that year;

(2) If a taxpayer cannot establish when property purchased for manufacturing investment reported for purposes of claiming this credit returned during the taxable year was placed in service, the taxpayer shall be treated as having placed it in service in the most recent prior year in which similar property was placed in service, unless the taxpayer can establish that the property placed in service in the most recent year is still on hand and used in manufacturing activity at the end of that year. In that event, the taxpayer will be treated as having placed the returned property in service in the next most recent year.
§11-13S-10. Tax credit review and accountability.

(a) Beginning on the first day of February, two thousand six, and on the first day of February every third year thereafter, the commissioner shall submit to the governor, the president of the Senate and the speaker of the House of Delegates a tax credit review and accountability report evaluating the cost effectiveness of the credit allowed under this article during the preceding three-year period. The criteria to be evaluated shall include, but not be limited to, for each year of the three-year period:

(1) The numbers of taxpayers claiming the credit;

(2) The net number of new jobs created by all taxpayers claiming the credit;

(3) The cost of the credit;

(4) The cost of the credit per new job created;

(5) Comparison of employment trends for an industry and for taxpayers within the industry that claim the credit.

(b) Taxpayers claiming the credit shall provide such information as the tax commissioner may require to prepare the report: Provided, That such information is subject to the confidentiality and disclosure provisions of sections five-d and five-s, article ten of this chapter of the code.

NOTE: The purpose of this bill is to terminate application of the Industrial Expansion And Revitalization Tax Credit, except as it applies for electricity manufacturers, to terminate the research and development projects tax credit, the tax credit for certain housing development projects, the tax credit for investment in facilities for producing coal-based liquids used to produce synthetic fuels, the aerospace industrial facilities investment credit and the management information services facilities tax credit; to grandfather those entitlements currently existing to those credits to be used in due course; to establish manufacturing investment tax credit for capital investment by a manufacturer in West Virginia; and to establish a research and development tax credit for investment in certain property used in research and development and certain research and development expenses, all to be effective January 1, 2002.

§11-13D-10 and §§11-13R and 11-13S are new; therefore, strike-throughs and underscoring have been omitted.