FISCAL NOTE

Date Requested: February 13, 2020
Time Requested: 10:21 AM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
1119 Comm. Sub. SB63
CBD Subject: Taxation


FUND(S):

General Revenue Fund

Sources of Revenue:

General Fund

Legislation creates:

Decreases Existing Revenue, Increases Existing Expenses



Fiscal Note Summary


Effect this measure will have on costs and revenues of state government.


The stated purpose of this bill is to create five year tax credits for persons engaging in industrial hemp manufacturing. According to our interpretation of the Committee Substitute for this bill, in tax years beginning on or after January 1, 2021, an eligible person engaged in industrial hemp manufacturing is allowed a tax credit in the amount of 50 percent of their capital expenditures for the first five taxable years. Businesses that benefit from other state economic development programs or incentives that result in a reduction of their income tax liability are not eligible for this credit. This credit would be first applied to the eligible taxpayer’s Corporation Net Income Tax liability and then to their Personal Income Tax liability and may not exceed 50 percent of the entity’s state income tax within a single year. The Committee Substitute for this bill defines industrial hemp as all parts and varieties of the plant Cannabis sativa L. and any part of the plant, including the seeds of the plant and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with no greater than 0.3% tetrahydrocannabinol. We cannot accurately estimate the loss to the General Revenue Fund upon passage of this bill as it would be difficult to determine the amount of qualified taxable income and income tax associated with potential recipients of this tax credit. The potential tax credit is very large relative to the tax liability tied to business activity. Therefore, the amount of the credit claimed would be largely determined by the qualified income tax liability of taxpayers participating in this tax program. Additional administrative costs incurred by the State Tax Department would be $15,000 in FY2022 and $5,000 per year in subsequent fiscal years.



Fiscal Note Detail


Effect of Proposal Fiscal Year
2020
Increase/Decrease
(use"-")
2021
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 0 0 5,000
Personal Services 0 0 5,000
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 0 0 0
Other 0 0 0
2. Estimated Total Revenues 0 0 0


Explanation of above estimates (including long-range effect):


According to our interpretation of the Committee Substitute for this bill, in tax years beginning on or after January 1, 2021, an eligible person engaged in industrial hemp manufacturing is allowed a tax credit in the amount of 50 percent of their capital expenditures for the first five taxable years. Businesses that benefit from other state economic development programs or incentives that result in a reduction of their income tax liability are not eligible for this credit. This credit would be first applied to the eligible taxpayer’s Corporation Net Income Tax liability and then to their Personal Income Tax liability and may not exceed 50 percent of the entity’s state income tax within a single year. The Committee Substitute for this bill defines industrial hemp as all parts and varieties of the plant Cannabis sativa L. and any part of the plant, including the seeds of the plant and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with no greater than 0.3% tetrahydrocannabinol. The 2014 United States Farm Bill allows a state to grow industrial hemp if it has implemented an official agricultural pilot program. In West Virginia, a person who produces or distributes industrial hemp must first secure a certificate from the State Commissioner of Agriculture. In 2017, the Legislature allowed cultivation of industrial hemp for commercial purposes. The 2018 Farm Bill legalized industrial hemp nationally. In 2020, the USDA’s Risk Management Agency (RMA) is now providing insurance coverage for hemp grown for fiber, flower or seeds, which will be available to producers who are in areas covered by USDA-approved hemp plans or who are part of approved state or university research pilot programs. According to the West Virginia Department of Agriculture (WVDA), in 2019, 132 West Virginia farmers grew 641 acres of industrial hemp, an increase of 486 acres from the prior calendar year. The number of State applicants for the 2020 growing season has more than doubled. As of October 1, 2019, 407 applications have been submitted for approval to the WVDA industrial hemp program, and this number will likely increase as final submissions are sent to the WVDA. We cannot accurately estimate the loss to the General Revenue Fund upon passage of this bill as it would be difficult to determine the amount of qualified taxable income and income tax associated with potential recipients of this tax credit. The potential tax credit is very large relative to the tax liability tied to business activity. Therefore, the amount of the credit claimed would be largely determined by the qualified income tax liability of taxpayers participating in this tax program. Additional administrative costs incurred by the State Tax Department would be $15,000 in FY2022 and $5,000 per year in subsequent fiscal years.



Memorandum


The stated purpose of this bill is to create five year tax credits for persons engaging in industrial hemp manufacturing. There is language in the Committee Substitute that states that if the proposed tax credit exceeds the tax liability (not 50 percent) for the year, then it can be carried forward. It is unclear whether the eligible taxpayer cannot carryforward unless this occurs, but then can carryforward all credit above 50 percent, or whether this allows the eligible taxpayer to claim credit up to 100 percent of the tax liability. There appears to be an inconsistency in this section of the bill. The Committee Substitute makes the tax credit available only for those eligible taxpayers who are “primarily engaged” in industrial hemp manufacturing. Definition of “primarily” in the committee substitute of this bill would be helpful in improving its clarity. This proposed tax credit is available to those individuals that use industrial hemp that is grown by persons licensed by the State Commissioner of Agriculture. The Committee Substitute provides a tax credit, but it appears to apply only if the hemp is produced in West Virginia. This raises Constitutional concerns as the Commerce Clause prohibits states from passing legislation that improperly burdens or discriminates against interstate commerce. This bill specifically excludes the manufacturing of CBD products from eligibility of this tax credit. This proposed tax credit may violate West Virginia’s equal protection clause. The bill title does not mention that the tax credit may be carried forward for five years.



    Person submitting Fiscal Note: Mark Muchow
    Email Address: kerri.r.petry@wv.gov