FISCAL NOTE
Date Requested: January 10, 2020
Time Requested: 03:46 PM |
| Agency: |
Tax & Revenue Department, WV State |
|---|
| CBD Number: |
Version: |
Bill Number: |
Resolution Number: |
| 1119 |
Introduced |
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. The bill establishes eligibility requirements for the tax credit and the amount of tax credit allowed.
According to our interpretation of 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 bill defines industrial hemp as all parts and varieties of the plant cannabis sativa L containing no greater than one percent one percent tetrahydrocannabinol.
We cannot 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 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 bill defines industrial hemp as all parts and varieties of the plant cannabis sativa L containing no greater than one percent one percent 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 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. The bill establishes eligibility requirements for the tax credit and the amount of tax credit allowed.
There are some concerns with this proposed legislation. First, the bill refers to Article 28 rather than Article 29. This bill does not further define what is meant by consumer products. The bill appears to not permit the credit for the manufacturer of industrial products. This distinction may be in violation of the State’s equal protection clause. Furthermore, it is not clear of the manufacturer of components of consumer products would be eligible for the tax credit.
The bill does not specify that capital expenditures need to be depreciated over their useful life and does not discuss how that will affect the calculation of this proposed credit. This bill does not define manufacturing, and therefore, it is possible that various arts and crafts or home type businesses may be able to qualify for this tax credit if they make products out of hemp.
There is no provision for recapture if the entity goes out of business or moves out of state within a given time.
The bill suggests that if the tax credit exceeds the tax liability for the year (not 50%) it can be carried forward. It is unclear whether the taxpayer cannot carryforward unless this occurs, but then can carryforward all credit above 50%, or whether this allows the taxpayer to claim credit up to 100% of the tax liability.
Person submitting Fiscal Note: Mark Muchow
Email Address: kerri.r.petry@wv.gov