FISCAL NOTE
FUND(S):
General Revenue Fund
Sources of Revenue:
General Fund
Legislation creates:
Neither Program nor Fund
Fiscal Note Summary
Effect this measure will have on costs and revenues of state government.
The stated purpose of this bill is to allow manufacturers a credit against their business franchise and corporation net income tax liabilities for the cost of intellectual property used in manufacturing activity in this State. When the manufacturer is a partnership, limited liability company or other pass-through entity and credit remaining after application against business franchise tax liability would flow through to the owners of the pass-through entity.
As written, the bill would provide both a deduction and a tax credit. The proposed deduction would be equal to 60 percent of the royalties, license fees or other consideration received by the developer from the sale, lease or licensing of intellectual property developed in the State. Additionally, the bill proposes that the deduction will be equal to 100 percent when the taxpayer reinvests at least 40 percent of the amount of the deduction in depreciable property purchased for purposes of developing additional intellectual property in this State during the next tax year. The deduction would apply to intellectual property developed after December 31, 2006. The tax credit would be equal to 60 percent of the intellectual property expenses and costs incurred to use intellectual property in this State. Additionally, the bill proposes that the tax credit will be equal to 100 percent when the taxpayer reinvests in such business in this State during the next tax year an amount equal to at least 40 percent of the tax credit amount. For taxpayers claiming the tax credit, an add back of the deduction would be required to preclude the claiming of both a deduction and a tax credit for the cost of the intellectual property. The credit would apply to intellectual property costs incurred after December 31, 2006.
The State Tax Department does not have access to the necessary information to estimate the potential revenue impact of this bill, however, it is expected that passage of this bill could result in a significant reduction in revenue.
Assuming that all returns will be accepted as filed with the exception of limited field audits, additional administrative costs to the State Tax Commissioner associated with passage of this bill would be roughly $60,000 in Fiscal Year 2008 and roughly $50,000 per year for each year thereafter. The proposed complex tax credit provisions apply to every business activity in the State and would not be limited to manufacturers as claimed in the stated purpose. The State Tax Department would need a massive increase in resources to more closely monitor this tax program.
Fiscal Note Detail
| Effect of Proposal |
Fiscal Year |
2007
Increase/Decrease
(use"-") |
2008
Increase/Decrease
(use"-") |
Fiscal Year
(Upon Full
Implementation) |
| 1. Estmated Total Cost |
0 |
0 |
0 |
| Personal Services |
0 |
0 |
0 |
| Current Expenses |
0 |
0 |
0 |
| Repairs and Alterations |
0 |
0 |
0 |
| Assets |
0 |
0 |
0 |
| Other |
0 |
0 |
0 |
| 2. Estimated Total Revenues |
0 |
0 |
0 |
Explanation of above estimates (including long-range effect):
Passage of this bill would provide both a deduction and a tax credit related to intellectual property. The proposed deduction would be equal to 60 percent of the royalties, license fees or other consideration received by the developer from the sale, lease or licensing of intellectual property developed in the State. Additionally, the bill proposes that the deduction will be equal to 100 percent when the taxpayer reinvests at least 40 percent of the amount of the deduction in depreciable property purchased for purposes of developing additional intellectual property in this State during the next tax year. The deduction would apply to intellectual property developed after December 31, 2006. The tax credit would be equal to 60 percent of the intellectual property expenses and costs incurred to use intellectual property in this State. Additionally, the bill proposes that the tax credit will be equal to 100 percent when the taxpayer reinvests in such business in this State during the next tax year an amount equal to at least 40 percent of the tax credit amount. For taxpayers claiming the tax credit, an add back of the deduction would be required to preclude the claiming of both a deduction and a tax credit for the cost of the intellectual property. The credit would apply to intellectual property costs incurred after December 31, 2006.
The State Tax Department does not have access to the necessary information to estimate the potential revenue impact of this bill, however, it is expected that passage of this bill could result in a significant reduction in revenue.
Assuming that all returns will be accepted as filed with the exception of limited field audits, additional administrative costs to the State Tax Commissioner associated with passage of this bill would be roughly $60,000 in Fiscal Year 2008 and roughly $50,000 per year for each year thereafter. The proposed complex tax credit provisions apply to every business activity in the State and would not be limited to manufacturers as claimed in the stated purpose. The State Tax Department would need a massive increase in resources to more closely monitor this tax program.
Memorandum
The stated purpose of this bill is to allow manufacturers a credit against their business franchise and corporation net income tax liabilities for the cost of intellectual property used in manufacturing activity in this State. When the manufacturer is a partnership, limited liability company or other pass-through entity and credit remaining after application against business franchise tax liability would flow through to the owners of the pass-through entity.
While the stated purpose specifically mentions manufacturers, it appears that, as written, the credit and deduction provided in the bill would be available to most business activities. Also, the bill uses a number of terms without providing clear definitions and there are a number of technical errors and typographical errors.
There is an apparent conflict in the effective dates in the bill. While several sections limit application of the bills’ provision to activity occurring on or after January 1, 2007, proposed section §11-13W-13 indicates that the provisions become effective on the July 1, 2007 and apply to intellectual property developed, purchased, leased or licensed December 31, 2007.
Person submitting Fiscal Note: Mark Muchow
Email Address: kpetry@tax.state.wv.us