Senate Bill No. 728
(By Senators McCabe, Browning, Green, Jenkins, Foster, Stollings,
Hall, Prezioso, Caruth, Minard and Plymale)
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[Introduced March 23, 2009; referred to the Committee on Economic
Development; and then to the Committee on Finance.]
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A BILL to amend the Code of West Virginia, 1931, as amended, by
adding thereto a new article, designated §11-13Z-1, §11-13Z-2,
§11-13Z-3, §11-13Z-4, §11-13Z-5, §11-13Z-6, §11-13Z-7,
§11-13Z-8, §11-13Z-9, §11-13Z-10, §11-13Z-11, §11-13Z-12,
§11-13Z-13 and §11-13Z-14, all relating generally to allowing
tax incentives when computing business franchise and West
Virginia income tax liabilities, corporate or personal, as the
case may be, for profits attributed to the use of patents
directly used in a manufacturing process or product developed
in this state or for royalties generated from patents directly
used in a manufacturing process or product developed in this
state; providing short title, legislative findings and
purpose; defining certain terms; specifying terms, conditions and rules for taking of tax credits; providing for forfeiture
of unused credit after period of years; allowing Tax
Commissioner to prescribe rules; requiring periodic reports by
Tax Commissioner on cost and effect of tax incentives;
providing rule of construction and for severability; providing
effective date; and specifying termination date.
Be it enacted by the Legislature of West Virginia:
That the Code of West Virginia, 1931, as amended, be amended
by adding thereto a new article, designated §11-13Z-1, §11-13Z-2,
§11-13Z-3, §11-13Z-4, §11-13Z-5, §11-13Z-6, §11-13Z-7, §11-13Z-8,
§11-13Z-9, §11-13Z-10, §11-13Z-11, §11-13Z-12, §11-13Z-13 and
§11-13Z-14, all to read as follows:
ARTICLE 13Z. COMMERCIAL PATENT INCENTIVES TAX ACT.
§11-13Z-1. Short title.
This article may be cited as the West Virginia Commercial
Patent Incentives Tax Act.
§11-13Z-2. Legislative findings and purpose.
The Legislature finds that encouraging the development and use
of commercial intellectual properties in this state is in the
public interest and promotes the general welfare of the people of
this state. In order to encourage greater development and use in
this state of commercial intellectual properties by West Virginia businesses and thereby increase economic opportunity in this state,
there are hereby enacted tax incentives for developing and using
patents in this state.
§11-13Z-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.
(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.
(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) "Credit year" means the taxable year in which the person
realizes the net profit attributable to a patent. In the case of
a license or lease to use patents, "credit year" means each taxable
year during the term of the license or lease to use patents.
(7) "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.
(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" mean the use of
patents directly in those activities or operations which constitute
an integral and essential part of the manufacturing processes and
products, as contrasted with and distinguished from those
activities or operations which are simply incidental, convenient or
remote to the manufacturing activity such as those activities that
are incidental. Those activities that are incidental to business
activities such as bills, marketing, inventory control, order
fulfillment, shipping and tracking are not considered an integral
and essential part of the manufacturing process or product.
(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) "Owner", when used in reference to a pass-through entity,
means a person who owns an equity interest in the pass-through
entity.
(13) "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.
(14) "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.
(15) "Patent" means a United States or foreign national patent
grant or United States certificate of invention or certificate of
protection under the Plant Variety Protection Office of the United
States Department of Agriculture and is limited to 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 shall not include copyrights, trademarks,
mask works, trade secrets or any intellectual property that is not
a patent.
(16) "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 shall be treated as a disregarded entity for purposes
of this article.
(17) "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.
(18) "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.
(19) "This code" means the Code of West Virginia, 1931, as
amended.
(20) "This state" means the State of West Virginia.
(21) "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.
(22) "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.
§11-13Z-4. Tax incentive for developing patents in this state.
(a)
Allowance of credit. -- A person engaging in this state in
developing patents for direct use in a manufacturing process or
product and who has an agreement, as defined in section three of
this article, with Marshall University or West Virginia University
shall be allowed as 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, 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 shall be allowed
when computing the tax imposed by article twenty-one of this
chapter on income from the person's business activity.
(b)
Amount of credit. -- The amount of credit allowed under
this section shall be 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, 2010:
Provided, That the amount of credit allowed
under this section shall be 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, 2010,
or improving upon a patent developed in this state or contributing
to a stipend to retain a graduate or post-doctoral student integral
to the development of the patents or related technology in taxable
years beginning on or after January 1, 2010, 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 shall be allowed in accordance with the
following rules and applied as provided in subsection (d) of this
section:
(1) No credit shall be 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 shall be
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 such
person receives;
(4) Unused credit may be carried forward until used for a
period of nine consecutive years after the taxable year in which
the credit allowed by this section accrues to the person. When the
person is an owner of a pass-through entity, credit accrues to the
owner when it accrues to the pass-through entity;
(5) No credit shall be 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, 2010. For purposes of this subdivision,
a patent was developed for direct use in a manufacturing process or
product before January 1, 2010, if before that date it was sold,
leased or licensed to a third party prior to January 1, 2010, 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, and as defined in section nine, article
twenty-one of this chapter or section three, article twenty-four of
this chapter; and
(6) No credit shall be 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 shall be allowed as a credit against
tax as provided in this subsection.
(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:
Provided, That the credit may not reduce the tax
below zero.
(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:
Provided, That the credit may not reduce the tax below zero.
(3)
Personal income tax on business income. --
(A) When the developer is a sole proprietor, the amount of the
allowable credit shall be 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:
Provided, That the
credit may not reduce the tax below zero.
(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 shall be 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 shall be 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:
Provided, That the credit may not reduce the tax
below zero.
§11-13Z-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 patent
developed in this state in a manufacturing process or product in
this state shall be 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 shall be equal to twenty percent of the net profit
attributable to the patent:
Provided, That the amount of credit
allowed under this section shall be 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 shall be allowed in accordance with the
following rules and applied as provided in subsection (d) of this
section:
(1) The credit allowed by this section shall be 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 used for a
period of nine consecutive years after the taxable year in which
the credit allowed by this section accrues to the person. When the
person is an owner of a pass-through entity, credit accrues to the
owner when it accrues to the pass-through entity;
(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 taxable year in which the
credit accrued to the person;
(4) No credit shall be allowed under this section for using a
patent in this state when the person began using the patent before
January 1, 2010;
(5) No credit shall be allowed under this section for using a
patent in this state for which the taxpayer is allowed credit under
another article of this chapter.
(d)
Application of credit. -- The amount of the credit computed under this section shall be allowed as a credit against
tax as provided in this subsection.
(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:
Provided, That the credit may not
reduce the tax below zero.
(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:
Provided, That the credit may not reduce the tax below
zero.
(3)
Personal income tax on business income. --
(A) When the person allowed the credit is a sole proprietor,
the amount of the allowable credit shall be 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:
Provided, That the credit may not reduce the tax below
zero.
(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 shall be 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
shall be 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:
Provided, That the credit may not reduce the tax below zero.
§11-13Z-6. Transfer of credit to successors.
(a)
Mere change in form of business. -- A patent may not be
treated as disposed of by reason of a mere change in the form of
conducting the business as long as the patent is retained and
directly used in a manufacturing process or product in this state
and the person that developed the patent 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 patent transferred to a successor.
(b)
Transfer or sale to successor. -- A patent may not be
treated as disposed of under this article by reason of any transfer
or sale to a successor business which continues to directly use the
patent in a manufacturing process or product in this state. Upon
transfer or sale, the successor shall acquire the amount of credit or deduction that remains available under this article for each
subsequent taxable year.
§11-13Z-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 deduction of 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 such 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 strait-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) Such other information as 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 shall 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.
§11-13Z-8. Failure to keep records of a patent for which credit
allowed.
A person who does not keep the records required for
identification of a patent for which a credit would be allowable
under this article is subject to the following rules:
(1) A person is treated as having disposed of, during the
taxable year, any patent for which a credit was allowed under this
article which the taxpayer cannot establish is still being directly
used in the person's manufacturing process or product in this state
at the end of that year.
(2) If a person cannot establish when a patent was placed in
service in direct use in the person's manufacturing process or
product in this state, no credit shall be allowed under this
article.
§11-13Z-9. Tax credit review and accountability.
(a) Beginning on February 1, 2013, and on February 1 annually
thereafter, the Tax 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 credits allowed under this article during the
most recent year for which information is available. The criteria to be evaluated include, but are not limited to, for each year:
(1) The number of taxpayers claiming the credit;
(2) The net number, type and duration of new jobs created by
all taxpayers claiming the credit and the wages and benefits paid;
(3) The cost of the credit;
(4) The cost of the credit per new job created; and
(5) A comparison of employment trends for the industry and for
taxpayers within the industry that claim the credit or deduction;
and
(b) Taxpayers claiming the credit shall provide such
information as the Tax Commissioner may require to prepare the
report required by this section:
Provided, That the information
shall be subject to the confidentiality and disclosure provisions
of sections five-d and five-s, article ten of this chapter.
§11-13Z-10. Promulgation of rules.
The Tax Commissioner shall promulgate, in the manner
prescribed in article three, chapter twenty-nine-a of this code,
such rules as the Tax Commissioner deems necessary to administer
this article.
§11-13Z-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 reasonably
construed in order to effectuate the legislative intent recited in
section two of this article.
§11-13Z-12. Effective date.
The provisions of this article become effective on July 1,
2009, and apply only to a patent developed in this state after the
taxable years beginning on or after January 1, 2010, and to a
patent purchased, leased or licensed for use after that date for
direct use in the taxpayer's manufacturing process or product in
this state.
§11-13Z-13. Termination of credit.
The Tax Commissioner may not allow any credit for a patent
developed or purchased leased or licensed after December 30, 2015,
unless this credit is sooner terminated or continued by the
Legislature. Termination of the credit allowed by this article, as
provided in this section, shall not adversely affect the ability of
a taxpayer to claim the benefit of any credit accruing under this
article prior to January 1, 2015.
§11-13Z-14. Severability.
The provisions of every section of this article shall be severable so that if any provision of any section of this article
is held to be unconstitutional or void by a court of competent
jurisdiction, the remaining provisions of this section and this
article shall remain valid, unless the court finds the valid
provisions are so essentially and inseparably connected with, and
so dependent upon, the unconstitutional or void provision that the
court cannot presume the Legislature would have enacted the
remaining valid provisions without the unconstitutional or void
provision, or unless the court finds the remaining valid
provisions, standing alone, are incomplete and are incapable of
being executed in accordance with the legislative intent. The
provisions of this section shall be fully applicable to all future
amendments or additions to this article with like effect as if the
provisions of this section were set forth in extension in every
such amendment or addition and were reenacted as a part thereof,
unless the amendment or addition contains its own severability
clause.
________
(NOTE: The purpose of this bill is to allow manufacturers a
credit against their business franchise and corporation net income
tax liabilities for a percentage of the net profits attributable to
a patent used in manufacturing processes and products in this state
and to allow a developer of a patent used in manufacturing
processes and products a credit against their business franchise
and corporation net income tax liabilities for the consideration
received as a result of developing the patent. 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.
Article 13Z is new; therefore, strike-throughs and
underscoring have been omitted.)