ENROLLED
H. B. 2993
(By Delegates White and T. Campbell)
(By Request of the State Tax Division)
[Passed March 12, 2011; in effect ninety days from passage.]
AN ACT to amend and reenact §11-13AA-3, §11-13AA-4, §11-13AA-5,
§11-13AA-7, §11-13AA-11 and §11-13AA-12 of the Code of West
Virginia, 1931, as amended, all relating to modifying the
provisions of the West Virginia Commercial Patents Incentives
Tax Act generally; defining terms; providing for tax credit
carryover and accrual; restricting eligibility for tax credit;
providing for disallowance of tax credit; providing for strict
construction; and retroactively adjusting the effective date
of the provisions of the Act.
Be it enacted by the Legislature of West Virginia:
That §11-13AA-3, §11-13AA-4, §11-13AA-5, §11-13AA-7,
§11-13AA-11 and §11-13AA-12 of the Code of West Virginia, 1931, as
amended, be amended and reenacted, all to read as follows:
ARTICLE 13AA. COMMERCIAL PATENT INCENTIVES TAX ACT.
§11-13AA-3. Definitions.
(a) General. -- When used in this article, or in the
administration of this article, terms defined in subsection (b) of
this section 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) "Agreement" means any agreement or contractual
relationship entered into after the effective date of this section
between a person developing patents in this state and either:
(A) A corporation established under the laws of this state
that meet the requirements of section three, article twelve,
chapter eighteen-b of this code; or
(B) A center for economic development and technological
advancement created pursuant to section three, article twelve-a,
chapter eighteen-b of this code.
(2) "Business activity" means all activities engaged in or
caused to be engaged in by a person with the object of gain or
economic benefit, direct or indirect. For purposes of this
definition, the term "gain or economic benefit, direct or indirect"
does not include income realized by any person in the form of
wages, salary or income that is reported on federal form W-2.
(3) "Commercial use" means selling, licensing, leasing or
otherwise making patents available to a third party for a price, fee, royalty, commission or other consideration called by whatever
name. "Commercial use" also means, in the case of patents
developed by the developer for the developer's own commercial use,
the first use of the patents in a manufacturing or other business
activity of the developer. "Commercial use" does not include any
selling, licensing, leasing or otherwise making patents available
to a third party when done by a broker or by any person who does
not own the patent sold, licensed, leased or otherwise made
available.
(4) "Commissioner" and "Tax Commissioner" are used
interchangeably herein and mean the Tax Commissioner of the State
of West Virginia or his or her designee.
(5) "Copyright" means a copyright that is registered with the
United States Copyright Office or with a similar office of a
foreign country when the foreign copyright is recognized under
federal law.
(6) "Delegate" in the phrase "or his or her delegate", when
used in reference to the Tax Commissioner, means any officer or
employee of the Tax Department of the Department of 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.
(7) "Development of a patent," "developing patents" or
"development" means the act of inventing or discovering any new and useful process, machine, article of manufacture, or composition of
matter, or any new and useful improvement thereto through
significant investment of money, performance of research, or
application of design or engineering expertise, which culminates in
the issuance of a patent, as defined in this article.
(8) "Developer" means a person engaged in this state in
developing patents for direct use in a manufacturing process or
product and who has an agreement, as defined in this section, with
Marshall University or West Virginia University.
(9)"Directly used in manufacturing process or product, "and
"direct use in manufacturing process or product" with reference to
patents means application or incorporation of a patented process,
machine, article of manufacture or composition of matter, in
manufacturing operations or processes, or in manufactured products,
in circumstances where United States or foreign patent laws require
that the specific patent for the process, machine, article of
manufacture or composition of matter be owned by the manufacturer,
or purchased, leased, licensed or authorized by contract to be
applied or incorporated in the manufacturing operation, processes
or product, and where such lawful ownership, purchase, lease,
licensure or contractual authorization is in effect.
(10) "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.
(11) "Mask work" means a series of related images, however
fixed or encoded:
(A) Having or representing the predetermined, three-
dimensional pattern of metallic, insulating or semiconductor
material present or removed from the layers of a semiconductor chip
product; and
(B) In which series the relation of the images to one another
is that each image has the pattern of the surface of one form of
the semiconductor chip product.
(12) "Net profits" means West Virginia taxable income as
determined for purposes of article twenty four of this chapter,
before application of this credit and after application of all
credits allowable under this chapter except this credit. In the
case of taxpayers that are not subject to the tax imposed by
article twenty-four, "net profits" means West Virginia taxable
income as determined for purposes of article twenty-one of this
chapter, before application of this credit and after application of
all credits allowable under this chapter except this credit. In
circumstances where net profit is not solely attributable to and
the exclusive result of the direct use of a patent in a
manufacturing process or product in this state, the taxpayer shall
determine net profit solely attributable to and the exclusive result of the direct use of a patent in a manufacturing process or
product in this state, and net profit for purposes of determining
the amount of credit allowable under this article shall be the net
profit solely attributable to and the exclusive result of the
direct use of a patent in a manufacturing process or product in
this state.
(13) "Owner", when used in reference to a pass-through entity,
means a person who owns an equity interest in the pass-through
entity.
(14) "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,
which is not a sole proprietorship, trust or estate, and which is
treated as a partnership for federal income tax purposes for the
taxable year.
(15) "Pass-through entity" means a partnership, limited
liability company, small business corporation (S corporation) or
other entity treated as a partnership for federal income tax
purposes for the taxable year.
(16) "Patent" means a United States patent issued pursuant to
35 U.S.C. §101, et seq. or the Patent Cooperation Treaty done at
Washington, on June 19, 1970 and is limited to plant patents,
design patents and patents developed in this state for direct use
in a manufacturing process or product, or both developed for use and directly used in a manufacturing process or product in this
state. For purposes of this article, patents do not include
copyrights, trademarks, mask works, trade secrets or any
intellectual property that is not a patent.
(17) "Person" includes a natural person, corporation, limited
liability company or partnership. A single member liability
company that is treated as a disregarded entity for federal income
tax purposes is be treated as a disregarded entity for purposes of
this article.
(18) "Purchase" means a transaction under which title to an
item is transferred for consideration, or a license or lease
contract for at least three years is executed, regardless of
whether title to the item is transferred at the end of the lease or
license period.
(19) "Taxpayer" means any person subject to the tax imposed by
article twenty-three or twenty-four of this chapter or to both
taxes. In the case of a sole proprietorship that is not subject to
either the tax imposed by article twenty-three or twenty-four of
this chapter, the term "taxpayer" means a natural person who owns
a disregarded entity and who is subject to the tax imposed by
article twenty-one of this chapter on his or her income from
business activity in this state, or any sole proprietor who is
subject to the tax imposed by article twenty-one of this chapter.
(20) "Trademark" means any trademark, trade name, service mark
or other identifying symbol or name that is registered with the
United States Patent and Trademark Office or with a similar office
of a foreign country when the foreign registration is recognized
under federal law.
(21) "Trade secret" means information, including a formula,
pattern, compilation, program device, method, technique or process,
that:
(A) Derives independent economic value, actual or potential,
from not being generally known to, and not being readily
ascertainable by proper means, by other persons who can obtain
economic value from its disclosure or use; and
(B) Is the subject of efforts that are reasonable under the
circumstances to maintain its secrecy.
§11-13AA-4. Tax incentive for developing patents in this state.
(a) Allowance of credit. -- A person engaging in this state in
developing
plant patent, design patent or patents for direct use in
a manufacturing process or product and who has an agreement, as
defined in section three of this article, is allowed a credit, when
computing the person's liability for business franchise tax imposed
by article twenty-three of this chapter and corporation net income
tax imposed by article twenty-four of this chapter, in the amount
allowed under subsection (b) of this section. When the developer
is a sole proprietor or a pass-through entity, that amount of the credit remaining after first applying it against the tax liability
under article twenty-three of this chapter for the taxable year is
allowed when computing the tax imposed by article twenty-one of
this chapter on income from the person's business activity. No
credit is allowed under this article for any activity, investment,
assets, or expenditures for which any of the tax credits authorized
under articles thirteen-d, thirteen-e, thirteen-q, thirteen-r,
thirteen-s, or thirteen-x of this chapter, has been authorized,
taken or allowed. No credit is allowed under this article for any
activity, investment, assets, or expenditures for which the tax
credits authorized under article thirteen, chapter eighteen-b, has
been, authorized, taken or allowed.
(b) Amount of credit. -- The amount of credit allowed under
this section is equal to twenty percent of the royalties, license
fees or other consideration received by the developer during the
taxable year from the sale, lease or licensing of a patent
developed in this state for direct use in a manufacturing process
or product by the person in taxable years beginning on or after
January 1, 2011: Provided, That the amount of credit allowed under
this section is thirty percent, rather than twenty percent, when
the person reinvests at least eighty percent of the amount of the
credit claimed for the taxable year in depreciable property
purchased for purposes of developing additional patents in this
state in taxable years beginning on or after January 1, 2011, or improving upon a patent developed in this state or contributing to
a stipend to retain a graduate or post-doctoral student in this
state integral to the development of the patents or related
technology in taxable years beginning on or after January 1, 2011,
during the next taxable year of the person, and the person has an
agreement, as defined in section three of this article, for the
development of a patent.
(c) Rules for application of credit. -- The amount of credit
computed under this section is allowed in accordance with the
following rules and applied as provided in subsection (d) of this
section:
(1) No credit is allowed under this section for royalties,
rents, license fees or other consideration received by the
developer of the patent for a patent developed outside this state,
except as provided in subdivision (2) of this subsection;
(2) When the person developed the patent for direct use in a
manufacturing process or product through that person's activity in
this state and through that person's activity in one or more other
states, the consideration received by the developer during the
taxable year from the sale, lease or license of the patent
developed through multistate activity of the developer is
multiplied by a fraction, the numerator of which is the direct
costs of developing the patent in this state and the denominator of
which is the total direct costs of developing the patent. The product of this computation establishes the consideration to be
used in subsection (b) of this section;
(3) If a person receives a portion of a royalty that would be
eligible for a tax credit under this section because of a business
association, licensing agreement or otherwise, the person may
receive the tax credit allowable to the portion of royalties that
person receives provided the person has an agreement, as defined in
section three of this article and otherwise meets the requirements
for entitlement to this credit, as set forth in subsection (a) of
this section;
(4) Unused credit may be carried forward until the earlier of
the tax year when the credit is used up or the ninth consecutive
tax year after the first tax year in which the taxpayer is eligible
to claim the credit. When the person is an owner of a pass-through
entity, credit may be taken by the owner beginning in the tax year
when credit may be taken by the pass-through entity or when the
pass through entity gains entitlement to the credit;
(5) No credit is allowed under this section for consideration
received by the developer for patents developed for direct use in
a manufacturing process or product before the taxable year
beginning January 1, 2011. For purposes of this subdivision, a
patent was developed for direct use in a manufacturing process or
product before January 1, 2011, if it was sold, leased or licensed
to a third party prior to January 1, 2011, or before that day it was reduced to practice for purely commercial purposes by the
developer or a person related to the developer, as defined in
subsection (b), Section 267 of the Internal Revenue Code of 1986,
as amended;
(6) No credit is allowed under this section for consideration
received by the developer from a person related to the developer,
as defined in subsection (b), Section 267 of the Internal Revenue
Code of 1986, as amended for patents developed for direct use in a
manufacturing process or product; and
(7) No credit is allowed under this section beginning with the
eleventh taxable year after the patent was first directly used in
a manufacturing process or product.
(d) Application of credit. -- The amount of the credit
computed under this section is allowed as a credit against tax as
provided in this subsection, but the credit may not reduce the tax
below zero.
(1) Business franchise tax.-- The amount of the allowable
credit shall first be taken as a credit against the tax liability
of the developer for the taxable year under article twenty-three of
this chapter.
(2) Corporation net income tax. -- The amount of the allowable
credit remaining, if any, after first applying the credit against
the tax imposed by article twenty-three of this chapter shall then be taken as a credit when computing the liability of the developer
for the taxable year under article twenty-four of this chapter.
(3) Personal income tax on business income. --
(A) When the developer is a sole proprietor, the amount of the
allowable credit is taken as a credit when computing the liability
of the developer for the taxable year on business income under
article twenty-one of this chapter.
(B) When the developer is a pass-through entity, the amount of
allowable credit remaining, if any, after first applying the credit
against the tax imposed by article twenty-three of this chapter for
the taxable year is allowed as a credit against the tax imposed for
the taxable year on the West Virginia source income of the pass-
through entity under article twenty-one of this chapter and the
amount of the credit is distributed to the owners of the pass-
through entity in the same manner as items of partnership income,
gain loss or deduction are distributed or allocated for the taxable
year.
§11-13AA-5. Tax credit for use of a patent in a manufacturing
process or product in this state that was developed
in this state.
(a) Allowance of credit. -- A person directly using a plant
patent, design patent or patent developed in this state in a
manufacturing process or product in this state is allowed a credit
against the person's liability for business franchise tax imposed by article twenty-three of this chapter and corporation net income
tax imposed by article twenty-four of this chapter, the amount
computed under subsection (b) of this section. When the user of a
patent is a sole proprietor or a pass-through entity, that amount
of credit allowed against income taxes shall be against the tax
imposed by article twenty-one of this chapter.
(b) Amount of credit. -- The amount of credit allowed under
this section is equal to twenty percent of the net profit
attributable to the patent: Provided, That the amount of credit
allowed under this section is equal to thirty percent of the net
profit attributable to the patent when the person claiming the
credit reinvests in capital improvements to add product lines to or
increase productivity in this state during the next taxable year an
amount equal to at least eighty percent of the tax credit amount
used for the taxable year.
(c) Rules for application of credit. -- The amount of credit
computed under this section is allowed in accordance with the
following rules and applied as provided in subsection (d) of this
section:
(1) The credit allowed by this section is applied after all
other credits allowed by this chapter have been applied against the
person's business franchise tax and West Virginia income tax
liabilities for the taxable year under this chapter;
(2) Unused credit may be carried forward until the earlier of
the tax year when the credit is used up or the ninth consecutive
tax year after the first tax year in which the taxpayer is eligible
to claim the credit. When the person is an owner of a pass-through
entity, credit may be taken by the owner beginning in the tax year
when credit may be taken by the pass-through entity or when the
pass through entity gains entitlement to the credit;
(3) Any credit not used within the ten-year period described
in subdivision (2) of this subsection is forfeited beginning with
the eleventh taxable year after the first tax year in which the
taxpayer is eligible to claim the credit;
(4) No credit is allowed under this section for using a patent
in this state when the person began using the patent before January
1, 2011;
(5) No credit is allowed under this section for using a patent
in this state for which the taxpayer is allowed credit under
another article of this chapter.
(6) No credit is allowed under this section for any patent
acquired from, by or between, leased from, by or between, licensed
from, by or between, or otherwise authorized to be used from, by or
between related persons, as defined in subsection (b), Section 267
of the Internal Revenue Code of 1986, as amended.
(7) Amounts received from, by or between related persons, as
defined in subsection (b), Section 267 of the Internal Revenue Code of 1986, as amended, are disallowed when calculating net profit
attributable to a patent.
(d) Application of credit. -- The amount of the credit
computed under this section is allowed as a credit against tax as
provided in this subsection, but the credit may not reduce the tax
below zero.
(1) Business franchise tax. -- The amount of the allowable
credit shall first be taken as a credit against the tax liability
of the person allowed the credit for the taxable year under article
twenty-three of this chapter.
(2) Corporation net income tax. -- The amount of the allowable
credit remaining, if any, after first applying the credit against
the tax imposed by article twenty-three of this chapter shall then
be taken as a credit when computing the liability of the
corporation for the taxable year under article twenty-four of this
chapter.
(3) Personal income tax on business income. --
(A) When the person allowed the credit is a sole proprietor,
the amount of the allowable credit is taken as a credit when
computing the liability of the person allowed the credit for the
taxable year on business income under article twenty-one of this
chapter.
(B) When the person allowed the credit is a pass-through
entity, the amount of allowable credit remaining, if any, after first applying the credit against the tax imposed by article
twenty-three of this chapter for the taxable year is allowed as a
credit against the tax imposed for the taxable year on the West
Virginia source income of the pass-through entity under article
twenty-one of this chapter and the amount of the credit is
distributed to the owners of the pass-through entity in the same
manner as items of partnership income, gain loss or deduction are
distributed or allocated for the taxable year.
§11-13AA-7. Identification of a patent and required records.
(a) Required records. -- Every developer of a patent in this
state for direct use in a manufacturing process or product and
every person who uses a patent directly in a manufacturing process
or product in this state who claims a credit under this article
shall maintain sufficient records to establish the following facts
for each item of a patent for which a credit is allowed under this
article:
(1) Its identity;
(2) The amount of net profit attributable to the patent;
(3) The month and taxable year in which the patent was first
used, placed in service or directly used in the person's
manufacturing process or product in this state;
(4) The amount of credit taken; and
(5) The date the patent was disposed of or otherwise ceased to
be directly used in the person's manufacturing process or product
in this state.
(b) Enhanced credit. -- Any person who claims the enhanced
credit under section four or five of this article shall maintain
sufficient records to clearly establish entitlement to claim the
amount of the enhanced credit. At a minimum those records shall
identify:
(1) Each and every item of depreciable property purchased for
purposes of claiming the enhanced credit;
(2) The date the depreciable property identified in
subdivision (1) of this subsection was purchased, its cost and its
estimated useful life determined using straight-line method of
depreciation;
(3) The date the depreciable property identified in
subdivision (1) of this subsection was placed in service or used in
the person's business activity in this state;
(4) The date the depreciable property identified in
subdivision (1) of this subsection was taken out of service or use
in the person's business activity in this state and the reason why
the property was taken out of service or use; and
(5) Other information that the Tax Commissioner may reasonably
require by rule promulgated as provided in section eleven of this
article.
(c) New jobs. -- Every person who claims a credit under this
article shall also maintain sufficient records to establish the
number and types of new jobs, if any created, the wages and
benefits paid to employees filling the new jobs and the duration of
each job.
(d) Exception. -- This section does not apply to an owner of
a pass-through entity that develops or uses a patent for which a
credit is allowed under this article.
§11-13AA-11. Interpretation and construction.
(a) No inference, implication or presumption of legislative
construction or intent may be drawn or made by reason of the
location or grouping of any particular section, provision or
portion of this article; and no legal effect may be given to any
descriptive matter or heading relating to any section, subsection
or paragraph of this article.
(b) The provisions of this article shall be strictly construed
in order to effectuate the legislative intent recited in section
two of this article.
§11-13AA-12. Effective date.
The provisions of this article retroactively become effective
on January 1, 2011, and apply only to a patent developed in this
state in tax years beginning on or after January 1, 2011, and to a
patent purchased, leased or licensed for use on or after that date for direct use in the taxpayer's manufacturing process or product
in this state.