OLR Bill Analysis

sSB 669

AN ACT CLARIFYING POLICIES REGARDING THE EXPENDITURES ELIGIBLE FOR THE RESEARCH AND DEVELOPMENT TAX CREDIT AND THE SALES TAXATION OF MANUFACTURING MACHINERY AND EQUIPMENT.

SUMMARY:

This bill narrows the types of research and development (R&D) expenses, and reduces the amount of contract research expenses, for which a company can claim either of the state's two R&D corporation tax credits. Under the bill, a company may claim only those expenses that are eligible for a federal R&D tax credit. Under current law, a company can claim a state credit for any research and experimentation expenses that federal tax law allows it to deduct on its federal return.

On the other hand, the bill increases the rates for both state R&D tax credits by 50%. It increases the incremental R&D credit from 20% to 30% of a company's annual increases in R&D spending. It increases the non-incremental (“rolling”) R&D credit, which varies depending on the amount of R&D spending in Connecticut and the company's size, from a range of 1% to 6% of eligible R&D spending to 1. 5% to 9% of that spending.

The bill applies to R&D tax credits for eligible R&D expenses that companies make in income years starting on or after January 1, 2006.

The bill also establishes a 16-member task force to study tax relief for manufacturers and report to the Finance, Revenue and Bonding and Commerce committees by January 1, 2007.

EFFECTIVE DATE: The R&D credit changes are effective July 1, 2006 and apply to income years starting on or after January 1, 2006. The task force provision takes effect on passage.

1 & 2 - R & D TAX CREDITS

R&D Expense Limit

Current law allows a company to claim a state R&D tax credit for any R&D expenses federally deductible under 174 of the Internal Revenue Code (IRC). The federal law and its accompanying regulations allow a company to deduct any reasonable R&D expense it incurs in connection with its trade or business. The costs must be for R&D “in the experimental or laboratory sense” and generally include all costs “incident to the development or improvement of a product,” such as attorneys' fees spent to obtain a patent (Treas. Reg. 1. 174-2(a)).

The bill limits the expenses eligible for a state R&D credit by tying them to the expenses for which the company can receive a federal R&D credit under IRC 41. That law limits eligible expenses to the following:

1. for in-house research, (a) wages paid to employees performing qualified research, (b) supplies, other than real estate and depreciable property, used in the research, and (c) amounts paid for the right to use computers in the research; and

2. for contract research, 65% of the amount paid to any person other than an employee, or 75% of the amount paid to a qualified research consortium, for the research.

Among the types of expenses currently eligible for a state R&D credit that the bill would exclude are:

1. fringe benefits and certain other costs, such as training and travel expenses, for employees conducting R&D;

2. maintenance, rent, utilities, and insurance for facilities or parts of facilities used in R&D;

3. depreciation expenses for R&D equipment;

4. property taxes for R&D-related property; and

5. R&D-related legal and consulting fees, including patent attorneys' fees.

Under both current law and the bill, to be eligible for a state R&D credit, expenses must occur in Connecticut.

R&D Credit Increase

The state has two R&D credits, incremental and non-incremental. The bill increases the credit percentages for both by 50%.

The incremental R&D credit provides a credit equal to a percentage of a company's increase in direct expenses for R&D conducted in Connecticut over its previous year's expenses. The bill raises the credit from 20% to 30% of the annual increase.

The non-incremental (“rolling”) R&D credit provides a tax credit equal to a percentage of R&D spending in Connecticut. The percentage varies according the amount of R&D spending or, in certain cases, company size and number of employees. The bill increases the credit range from 1%-6% to 1. 5%-9% (see Table 1).

TABLE 1: CURRENT AND PROPOSED NON-INCREMENTAL R&D CREDITS

Annual R&D Spending/ Company Size

Non-Incremental R&D Credit

Current Law

The Bill

$ 50 million or less

1%

1. 5%

Over $ 50 million to $ 100 million

$ 500,000 + 2% of the excess over $ 50 million

$ 500,000 + 3% of the excess over $ 50 million

Over $ 100 million to $ 200 million

$ 1. 5 million + 4% of the excess over $ 100 million

$ 1. 5 million + 6% of the excess over $ 100 million

Over $ 200 million

$ 5. 5 million + 6% of the excess over $ 200 million

$ 5. 5 million + 9% of the excess over $ 200 million

Qualified small business (annual gross income $ 100 million or less)

6%

9%

Business employing over 2,500 with annual revenue over $ 3 billion and headquartered in an enterprise zone

At least 3. 5%

At least 5. 25%

3 – MANUFACTURERS' TAX RELIEF TASK FORCE

The bill establishes a 16-member task force to study tax relief for manufacturers. The task force must:

1. examine sales and use tax exemptions intended to encourage and make it easier to invest in new technologies and manufacturing machinery and equipment,

2. review laws intended to preserve and promote manufacturing and manufacturing jobs in the state, and

3. develop recommendations to provide clarity and consistency in the application of the exemptions and laws.

The task force members are the (1) Finance, Revenue and Bonding and Commerce Committee chairmen; (2) the revenue services and economic and community development commissioners or their designees; and (3) 10 members representing various groups appointed by the governor and legislative leaders (see Table 2).

TABLE 2: MANUFACTURING TAX RELIEF TASK FORCE APPOINTEES

No.

Representing

Appointed by

2

State wide business group

House speaker

2

State wide manufacturers' group

Senate president pro tempore

1

Labor group

House majority leader

1

Labor group

Senate majority leader

1

Municipal government

House minority leader

1

Municipal government

Senate minority leader

2

Quasi-public agencies

Governor

Any task force member who is appointed by a legislative leader may be a legislator. Appointing authorities must make their appointments within 30 days after the bill's passage. Vacancies are filled by appointing authorities. The House speaker and the Senate president pro tempore select the task force chairmen from among the members. The chairmen must schedule the first meeting within 60 days after the bill's passage.

The task force must report to the Finance, Revenue and Bonding and Commerce committees by January 1, 2007. It goes out of existence on that date or the date it delivers its report, whichever is later. The Finance, Revenue and Bonding Committee staff serves as the task force staff.

COMMITTEE ACTION

Finance, Revenue and Bonding Committee

Joint Favorable Substitute

Yea

31

Nay

18

(04/03/2006)