Senate Bill No. 752
(By Senators Helmick, Plymale, Chafin, Prezioso,
Edgell, Love, Bailey, Bowman, McCabe, Unger, Sypolt,
Fanning, Facemyer, Boley, Sprouse and Guills)
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[Originating in the Committee on Finance;
reported February 26, 2007.]
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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 sixty 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 sixty percent, when the person reinvests at least forty percent of the amount of the deduction in depreciable property purchased for purposes of developing additional intellectual property in this state 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 sixty 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 forty percent of the tax credit amount.
(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.

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(NOTE: The 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.

Article 13W is new. Therefore, strike-through and underscoring have been omitted.)