ENGROSSED
Senate Bill No. 752
(By Senators Helmick, Plymale, Chafin, Prezioso,
Edgell, Love, Bailey, Bowman, McCabe, Unger, Sypolt,
Fanning, Facemyer, Boley, Sprouse and Guills)
____________
[Originating in the Committee on Finance;
reported February 26, 2007.]
____________
A BILL to amend the Code of West Virginia, 1931, as amended, by
adding thereto fifteen new sections, designated §11-13W-1,
§11-13W-2, §11-13W-3, §11-13W-4, §11-13W-5, §11-13W-6, §11-
13W-7, §11-13W-8, §11-13W-9, §11-13W-10, §11-13W-11, §11-13W-
12, §11-13W-13, §11-13W-14 and §11-13W-15, 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 cost of intellectual
property developed or used in this state or both developed and
used in this state; providing short title, legislative
findings and purpose; defining certain terms; specifying
terms, conditions and rules for taking of tax credits and
deductions; 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; proving 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 fifteen new sections, designated §11-13W-1, §11-
13W-2, §11-13W-3, §11-13W-4, §11-13W-5, §11-13W-6, §11-13W-7, §11-
13W-8, §11-13W-9, §11-13W-10, §11-13W-11, §11-13W-12, §11-13W-13,
§11-13W-14 and §11-13W-15, all to read as follows:
ARTICLE 13W. COMMERCIAL INTELLECTUAL PROPERTY INCENTIVES TAX ACT.
§11-13W-1. Short title.
This article may be cited as the West Virginia Commercial
Intellectual Property Incentives Tax Act.
§11-13W-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
intellectual property in this state.
§11-13W-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 intellectual property in this state and
either: (A) A corporation established under the laws of this state
that meets 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 intellectual property available to a third party
for a price, fee, royalty, commission or other consideration by
whatever name called. "Commercial use" also means, in the case of
intellectual property developed by the developer for the
developer's own commercial use, the first use of the intellectual property 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 delegate.
(5) "Copyright" means a copyright that is registered with the
United State 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 costs
are incurred. In the case of a license or lease to use
intellectual property, "credit year" means each taxable year during
the term of the license or lease to use intellectual property.
(7) "Deduction year" means the year in which gross receipts or
other valuable consideration for the use of intellectual property
is received for federal income tax purposes by the owner of the
intellectual property.
(8) "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 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.
(9)"Intellectual property" means patents, trademarks, copyrights, mask works, trade secrets and similar types of
intangible assets developed in this state for commercial purposes,
used in this state for commercial purposes, or both developed and
used in this state for commercial purposes.
(10) "Intellectual property expenses and costs" includes:
(A) Expenses, losses and costs for, related to, or in
connection directly or indirectly with the direct or indirect
acquisition, use, maintenance or management, ownership, sale,
exchange, or any other disposition of intellectual property to the
extent such amounts are allowed as deductions or costs in
determining taxable income before operating loss deduction and
special deductions for the taxable year under the federal Internal
Revenue Code of 1986, as amended;
(B) Losses related to, or incurred in connection directly or
indirectly with, factoring transactions or discounting
transactions;
(C) Royalty, patent, technical and copyright fees;
(D) Licensing fees; and
(E) Other similar expenses and costs.
(11) "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.
(12) "Mask work" means is 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.
(13) "Owner" when used in reference to a passthrough 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 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.
(17) "Person" includes any 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.
(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 who is subject to
neither the tax imposed by article twenty-three nor the tax imposed
by article twenty-four of this chapter, the term "taxpayer" means
any sole proprietor, or 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.
(20) "This code" means the Code of West Virginia, one thousand
nine hundred thirty-one, as amended.
(21) "This state" means the State of West Virginia.
(22) "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.
(23) "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 no 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.
§11-13W-4. Tax incentive for developing intellectual property in
this state.
(a)
Allowance of deduction. - A person engaging in this state
in developing intellectual property for commercial use shall be
allowed as a deduction when computing the person's business
franchise tax and corporation net income tax liabilities 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
deduction allowed when computing income tax shall be allowed
against when computing the tax imposed by article twenty-one of
this chapter on income from business activity.
(b)
Amount of deduction. - The amount of deduction allowed
under this section shall be equal to fifty percent of the
royalties, license fees or other consideration received by the developer during the taxable year from the sale, lease or licensing
of intellectual property developed in this state by the person
after the thirty-first day of December, two thousand six:
Provided, That the amount of deduction allowed under this section
shall be one hundred percent, rather than fifty percent, when the
person reinvests at least sixty percent of the amount of the
deduction in depreciable property purchased for purposes of
developing additional intellectual property in this state in
partnership with West Virginia University or Marshall University or
state colleges as defined in section two, article one, chapter
eighteen-b of this code or improving upon intellectual property
developed in this state after the thirty first day of December, two
thousand six during the next taxable year of the person and the
person has an agreement for the development of intellectual
property as defined in section three of this article.
(c)
Rules for application of deduction. - The amount of
deduction allowed under this section shall be computed in
accordance with the following rules and applied as provided in
subsection (d) of this section:
(1) No deduction shall be allowed under this section for
royalties, rents, license fees or other consideration received by
the developer of the intellectual property for intellectual
property developed outside this state, except as provided in
subdivision (3) of this subsection;
(2) When the person developed the intellectual property
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 intellectual property developed through
multistate activity of the developer shall be multiplied by a
fraction the numerator of which is the direct costs of developing
the intellectual property in this state and the denominator of
which is the total direct costs of developing the intellectual
property. The product of this computation establishes the
consideration to be used in subsection (b) of this section;
(3) No deduction shall be allowed under this section for
consideration received by the developer for intellectual property
developed for commercial use before the first day of January, two
thousand seven. For purposes of this subdivision, intellectual
property was developed for commercial use before the first day of
January, two thousand seven, if before that date it was sold,
leased, or licensed to a third party or prior to the first day of
January, two thousand seven, or before that day it was used by the
developer in a manufacturing, service or other commercial business
activity of the developer; and
(4) No deduction shall be allowed under this section beginning
with the eleventh taxable year after the intellectual property was
first used for commercial purposes.
(d)
Application of deduction. - The amount of the deduction
allowable by this section shall be allowed as a deduction as
provided in this subsection.
(1)
Business franchise tax. - The amount of the allowable
deduction shall be taken as a deduction as when computing the tax
base of the developer for the taxable year under section four,
article twenty-three of this chapter:
Provided, That the deduction
may not be reduced the tax base below zero.
(2)
Corporation net income tax. - The amount of the allowable
deduction shall be taken as a decreasing modification when
computing the adjusted federal taxable income of the developer for
the taxable year under section six, 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 deduction shall be taken as a decreasing modification
when computing the West Virginia adjusted gross income of the
developer for the taxable year under section twelve, article
twenty-one of this chapter.
(B) When the developer is a pass-through entity, the amount of
the allowable deduction shall be allowed as a subtraction from
partnership income for the taxable year under article twenty-one of
this chapter and the amount of the deduction 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.
§11-13W-5. Tax credit for using intellectual property in business
activity in this state.
(a)
Allowance of credit. - A person using intellectual
property in a business activity 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 allowed under subsection (b) of this section. When the user
of intellectual property is a sole proprietor or a pass-through
entity, that amount of credit allowed against income taxes shall be
allowed against the tax imposed by article twenty-one of this
chapter on the person's income from business activity.
(b)
Amount of credit. - The amount of credit allowed under
this section shall be equal to fifty percent of the intellectual
property expenses and costs incurred to use intellectual property
in this state in business activity:
Provided, That the amount of
credit allowed under this section shall be equal to one hundred
percent of the intellectual property expenses and costs incurred to
use intellectual property in this state in business activity when
the person claiming the credit reinvests in such business in this
state during the next taxable year an amount equal to at least
sixty percent of the tax credit amount and the intellectual property used is developed by West Virginia University or Marshall
University or state colleges as defined in section two, article
one, chapter eighteen-b of this code.
(c)
Rules for application of credit. - The amount of credit
allowed under this section shall be computed in accordance with the
following rules and applied as provided in subsection (d) of this
section:
(1) The amount of the costs of intellectual property taken as
a deduction for the taxable year when determining the person's
federal taxable income for the year and for which credit is
allowable under this article shall be added to the person's federal
taxable income when determining West Virginia taxable income under
article twenty-four of this chapter. A pass-through entity shall
make a similar adjustment when determining the amount of West
Virginia source income distributable to its owners. The purpose of
the adjustment required by this subdivision is to avoid allowing
the taxpayer both a deduction and a credit for the cost of the
intellectual property;
(2) The credit allowed by this section shall be applied after
all other credits allowed by this chapter have been applied against
the taxpayer's business franchise tax and West Virginia income tax
liabilities for the taxable year;
(3) Unused credit may be carried forward for a period of nine
consecutive years after the taxable year in which the credit allowed by this section accrues to the person;
(4) Any credit not used within the ten-year period described
in subdivision (3) of this subsection is forfeited beginning with
the eleventh taxable year after the taxable year in which the
credit accrued to the person;
(5) No credit shall be allowed under this section for the cost
of using intellectual property in this state that accrued or was
incurred before the first day of July, two thousand seven, or for
which credit is allowed under another article of this chapter;
(6) No credit shall be allowed under this section for the cost
of using intellectual property in this state; and
(7) When a person uses intellectual property in this state and
in one or more other states under the same contract, the cost shall
be allocated among the states in which the intellectual property is
used, in accordance with rules promulgated by the Tax Commissioner.
Only the portion of the costs allocated to West Virginia may be
used as costs for purposes of this section.
§11-13W-6. Tax credit for use of intellectual property in
commercial business activity in this state that was
developed in this state.
(a)
Allowance of credit. - A person using intellectual
property developed in this state in a business activity 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 allowed under subsection (b) of
this section. When the user of intellectual property 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 sixty percent of the intellectual
property expenses and costs incurred to use intellectual property
in this state in business activity.
(c)
Rules for application of credit. - The amount of credit
allowed under this section shall be computed in accordance with the
following rules and applied as provided in section (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;
(2) Unused credit may be carried forward for a period of nine
consecutive years after the taxable year in which the credit
allowed by this section accrues to the person;
(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 the cost
of using intellectual property in this state that accrued or was
incurred before the first day of July, two thousand seven, or for
which credit is allowed under another article of this chapter;
(5) No credit shall be allowed under this section for the cost
of using intellectual property in this state; and
(6) When a person uses intellectual property in this state and
in one or more other states under the same contract the cost shall
be allocated among the states in which the intellectual property is
used, in accordance with rules promulgated by the tax commissioner.
Only the portion of the costs allocated to West Virginia may be
used as costs for purposes of this section.
§11-13W-7. Transfer of credit or deduction to successors.
(a)
Mere change in form of business. -- Intellectual property
may not be treated as disposed of by reason of a mere change in the
form of conducting the business as long as the intellectual
property is retained in a business in this state and the person
that developed the intellectual property retains a controlling
interest in the successor business. In this event, the successor
business is allowed to claim the amount of credit or deduction
still available with respect to the intellectual property
transferred to a successor.
(b)
Transfer or sale to successor. -- Intellectual property may not be treated as disposed of under this article by reason of
any transfer or sale to a successor business which continues to use
the intellectual property in business activity 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.
§11-13W-8. Identification of intellectual property and required
records.
(a)
Required records. - Every developer of intellectual
property in this state for commercial use and every user of
intellectual property in this state who claims a credit or
deduction under this article shall maintain sufficient records to
establish the following facts for each item of intellectual
property for which a credit or deduction is allowed under this
article:
(1) Its identity;
(2) Its actual or reasonably determined cost;
(3) The month and taxable year in which the intellectual
property was first used placed in service or use in this state;
(4) The amount of credit or deduction taken; and
(5) The date the intellectual property was disposed of or
otherwise ceased to be used in the person's business activity in
this state.
(b)
Enhanced deduction of credit. - Any persons who claims the enhanced deduction under section four of this article, or the
enhanced credit under sections five or six of this article, or
claim both the enhanced deduction and the enhanced credit, shall
maintain sufficient records to clearly establish entitlement to
claim the amount of the enhanced deduction or the enhanced credit,
or both the enhanced deduction and 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 deduction or 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 use 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 or deduction 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 intellectual property
for which a credit or deduction is allowed under this article.
§11-13W-9. Failure to keep records of intellectual property for
which credit allowed.
A person who does not keep the records required for
identification of intellectual property for which a credit or
deduction 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 intellectual property for which a credit or
deduction was allowed under this article which the taxpayer cannot
establish is still being used in the person's business activity in
this state at the end of that year.
(2) If a person cannot establish when intellectual property
was placed in service use in the person's business activity in this
state no credit or deduction shall be allowed under this article.
§11-13W-10. Tax credit review and accountability.
(a) Beginning on the first day of February, two thousand
eleven, and on the first day of February every third year 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 credit allowed under this article during the
most recent three-year period for which information is available.
The criteria to be evaluated includes, but is not limited to, for
each year of the three-year period:
(1) The numbers of taxpayers claiming the credit;
(2) The number of taxpayers claiming the deduction;
(3) The net number, type and duration of new jobs created by
all taxpayers claiming the credit or deduction and the wages and
benefits paid;
(4) The cost of the credit;
(5) The cost of the deduction;
(6) The cost of the credit per new job created;
(7) The cost of the deduction per new job created; and
(8) 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 or deduction 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.
§11-13W-11. 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.
§11-13W-12. 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.
§11-13W-13. Effective date.
The provisions of this article become effective on the first
day of July, two thousand seven, and apply only to intellectual
property developed in this state after the thirty-first day of
December, two thousand seven, and to intellectual property
purchased, leased or licensed for use after that date for use in
the taxpayer's business activity in this state.
§11-13W-14. Termination of credit.
The Tax Commissioner may not allow any credit or deduction for intellectual property developed or purchased leased or licensed
after the thirty-first day of December, two thousand twelve, 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 the first day of January, two thousand thirteen.
§11-13W-15. 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 the 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
one, 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 extenso in every such amendment or
addition and were reenacted as a part thereof, unless the amendment or addition contains its own severability clause.