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

Be it enacted by the Senate and House of Representatives in General Assembly convened:

Section 1. Subsection (a) of section 12-217j of the general statutes is repealed and the following is substituted in lieu thereof (Effective July 1, 2006, and applicable to income years commencing on or after January 1, 2006):

(a) (1) There shall be allowed as a credit against the tax imposed on any corporation under this chapter, with respect to income years of such corporation commencing on or after January 1, 1994, but prior to income years commencing on or after January 1, 2006, an amount equal to twenty per cent of the amount spent by such corporation directly on research and experimental expenditures, as defined in Section 174 of the Internal Revenue Code of 1986, or any subsequent corresponding internal revenue code of the United States, as from time to time amended, which are conducted in this state and which exceeds the amount spent by such corporation during the preceding income year of such corporation for such expenditures.

(2) There shall be allowed as a credit against the tax imposed on any corporation under this chapter, with respect to income years of such corporation commencing on or after January 1, 2006, an amount equal to thirty per cent of the amount spent by such corporation directly on research and experimental expenditures, as defined in Section 41 of the Internal Revenue Code of 1986, as in effect on December 31, 2005, which are conducted in this state and which exceeds the amount spent by such corporation during the preceding income year of such corporation for such expenditures.

Sec. 2. Subsections (b) and (c) of section 12-217n of the general statutes are repealed and the following is substituted in lieu thereof (Effective July 1, 2006, and applicable to income years commencing on or after January 1, 2006):

(b) For purposes of this section:

(1) "Research and development expenses" means: (A) For those credits allowed pursuant to this section for expenditures made during income years commencing prior to January 1, 2006, research or experimental expenditures deductible under Section 174 of the Internal Revenue Code of 1986, as in effect on May 28, 1993, determined without regard to Section 280C(c) [thereof] of said Internal Revenue Code or any elections made by a taxpayer to amortize such expenses on its federal income tax return that were otherwise deductible, and basic research payments as defined under Section 41 of said Internal Revenue Code to the extent not deducted under said Section 174, provided: [(A)] (i) Such expenditures and payments are paid or incurred for such research and experimentation and basic research conducted in this state; and [(B)] (ii) such expenditures and payments are not funded, within the meaning of Section 41(d)(4)(H) of said Internal Revenue Code, by any grant, contract, or otherwise by a person or governmental entity other than the taxpayer unless such other person is included in a combined return with the person paying or incurring such expenses; (B) for those credits allowed pursuant to this section for expenditures made during income years commencing on or after January 1, 2006, research or experimental expenditures as defined pursuant to Section 41 of the Internal Revenue Code of 1986, as in effect on December 31, 2005, determined without regard to Section 280C(c) of said Internal Revenue Code or any elections made by a taxpayer to amortize such expenses on its federal income tax return that were otherwise deductible, provided: (i) Such expenditures and payments are paid or incurred for such research and experimentation and basic research conducted in this state; and (ii) such expenditures and payments are not funded, within the meaning of Section 41(d)(4)(H) of said Internal Revenue Code, by any grant, contract, or otherwise by a person or governmental entity other than the taxpayer unless such other person is included in a combined return with the person paying or incurring such expenses;

(2) "Combined return" shall mean a combined corporation business tax return under section 12-223a;

(3) "Commissioner" means the Commissioner of Economic and Community Development;

(4) "Qualified small business" means a company that (A) has gross income for the previous income year that does not exceed one hundred million dollars, and (B) has not, in the determination of the commissioner, met the gross income test through transactions with a related person, as defined in section 12-217w.

(c) (1) The amount allowed as a credit in any income year shall be the tentative credit calculated under subdivision (2) of this subsection, modified as provided in subsection (e) or (f) of this section, if applicable, except that in the case of a qualified small business the tentative credit allowed for research and development expenses shall be equal to [six] nine per cent of such expenses or in the case of any business employing over two thousand five hundred people in the state of Connecticut with annual revenues in excess of three billion dollars and headquartered in an enterprise zone the tentative credit allowed for research and development expenses shall be equal to the greater of (A) the tentative credit calculated under subdivision (2) of this subsection, modified as provided in subsection (e) or (f) of this section, if applicable, or (B) [three and one-half] five and one-quarter per cent of such expense.

(2) Where the research and development expenses paid or incurred in the income year equal: (A) Fifty million dollars or less, the tentative credit allowed shall be an amount equal to [one] one and one-half per cent of such expenses; (B) more than fifty million dollars but not more than one hundred million dollars, the tentative credit allowed shall be equal to five hundred thousand dollars plus [two] three per cent of the excess of such expenses over fifty million dollars; (C) more than one hundred million dollars but not more than two hundred million dollars, the tentative credit allowed shall be equal to one million five hundred thousand dollars plus [four] six per cent of the excess of such expenses over one hundred million dollars; and (D) more than two hundred million dollars, the tentative credit allowed shall be equal to five million five hundred thousand dollars plus [six] nine per cent of the excess of such expenses over two hundred million dollars.

Sec. 3. (Effective from passage) (a) There is established a task force to study tax relief for manufacturers. Such study shall include, but not be limited to, (1) an examination of exemptions from the sales and use tax intended to encourage and facilitate investment in new technologies and manufacturing machinery and equipment, (2) a review of other statutory provisions intended to preserve and promote manufacturing and manufacturing jobs in Connecticut, and (3) development of recommendations to provide clarity and consistency in the application of such exemptions and other statutory provisions.

(b) The task force shall consist of the following members:

(1) Two representatives of a state-wide business group appointed by the speaker of the House of Representatives;

(2) Two representatives of a state-wide manufacturers' group appointed by the president pro tempore of the Senate;

(3) One representative of a labor group appointed by the majority leader of the House of Representatives;

(4) One representative of a labor group appointed by the majority leader of the Senate;

(5) One representative from municipal government appointed by the minority leader of the House of Representatives;

(6) One representative from municipal government appointed by the minority leader of the Senate;

(7) The Commissioners of Revenue Services and Economic and Community Development, or the commissioners' designees;

(8) Two representatives from quasi-public agencies concerned with economic development appointed by the Governor; and

(9) The chairpersons of the joint standing committees of the General Assembly having cognizance of matters relating to commerce and finance, revenue and bonding.

(c) Any member of the task force appointed under subdivision (1), (2), (3), (4), (5) or (6) of subsection (b) of this section may be a member of the General Assembly.

(d) All appointments to the task force shall be made no later than thirty days after the effective date of this section. Any vacancy shall be filled by the appointing authority.

(e) The speaker of the House of Representatives and the president pro tempore of the Senate shall select the chairpersons of the task force, from among the members of the task force. Such chairpersons shall schedule the first meeting of the task force, which shall be held no later than sixty days after the effective date of this section.

(f) The administrative staff of the joint standing committee of the General Assembly having cognizance of matters relating to finance, revenue and bonding shall serve as administrative staff of the task force.

(g) Not later than January 1, 2007, the task force shall submit a report on its findings and recommendations to the joint standing committees of the General Assembly having cognizance of matters relating to finance, revenue and bonding, and economic and community development, in accordance with the provisions of section 11-4a of the general statutes. The task force shall terminate on the date that it submits such report or January 1, 2007, whichever is later.