1-1 By: Sibley, et al. S.B. No. 5 1-2 (In the Senate - Filed January 26, 1999; January 28, 1999, 1-3 read first time and referred to Committee on Finance; 1-4 April 15, 1999, reported adversely, with favorable Committee 1-5 Substitute by the following vote: Yeas 10, Nays 0; April 15, 1999, 1-6 sent to printer.) 1-7 COMMITTEE SUBSTITUTE FOR S.B. No. 5 By: Truan 1-8 A BILL TO BE ENTITLED 1-9 AN ACT 1-10 relating to the authorization of certain franchise tax incentives 1-11 promoting economic development. 1-12 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: 1-13 SECTION 1. Chapter 171, Tax Code, is amended by adding 1-14 Subchapter O to read as follows: 1-15 SUBCHAPTER O. TAX CREDIT FOR CERTAIN RESEARCH AND 1-16 DEVELOPMENT ACTIVITIES 1-17 Sec. 171.721. DEFINITIONS. In this subchapter: 1-18 (1) "Base amount," "basic research payment," and 1-19 "qualified research expense" have the meanings assigned those terms 1-20 by Section 41, Internal Revenue Code, except that all such payments 1-21 and expenses must be for research conducted within this state. 1-22 (2) "Strategic investment area" means a county within 1-23 this state with above state average unemployment and below state 1-24 average per capita income. 1-25 Sec. 171.722. ELIGIBILITY. (a) A corporation is eligible 1-26 for a credit against the tax imposed under this chapter in the 1-27 amount and under the conditions and limitations provided by this 1-28 subchapter. 1-29 (b) A corporation may claim a credit under Section 1-30 171.723(b) or take a carryforward credit without regard to whether 1-31 the county in which it made qualified research expenses and basic 1-32 research payments subsequently loses its designation as a strategic 1-33 investment area. 1-34 Sec. 171.723. CALCULATION OF CREDIT. (a) The credit for 1-35 any report equals four percent of the sum of: 1-36 (1) the excess of qualified research expenses incurred 1-37 in this state during the period upon which the tax is based over 1-38 the base amount for this state; and 1-39 (2) the basic research payments determined under 1-40 Section 41(e)(1)(A), Internal Revenue Code, for this state during 1-41 the period upon which the tax is based. 1-42 (b) In computing the credit under Subsection (a), a 1-43 corporation may multiply by two the amount of any qualified 1-44 research expenses and basic research payments made in a strategic 1-45 investment area as determined by the comptroller under Section 1-46 171.726. 1-47 (c) The burden of establishing entitlement to and the value 1-48 of the credit is on the corporation. 1-49 Sec. 171.724. LIMITATIONS. (a) The total credit claimed 1-50 under this subchapter for a report, including the amount of any 1-51 carryforward credit under Section 171.725, may not exceed 25 1-52 percent of the amount of franchise tax due for the report before 1-53 any other applicable tax credits. 1-54 (b) The total credit claimed under this subchapter and 1-55 Subchapters P and Q for a report, including the amount of any 1-56 carryforward credits, may not exceed the amount of franchise tax 1-57 due for the report after any other applicable credits. 1-58 (c) A corporation that establishes its eligibility for a 1-59 credit under this subchapter is not eligible to establish a credit 1-60 under Subchapter P. 1-61 Sec. 171.725. CARRYFORWARD. If a corporation is eligible 1-62 for a credit that exceeds the limitation under Section 171.724(a) 1-63 or (b), the corporation may carry the unused credit forward for not 1-64 more than 20 consecutive reports. A credit carryforward from a 2-1 previous report is considered to be utilized before the current 2-2 year credit. 2-3 Sec. 171.726. DETERMINATION OF STRATEGIC INVESTMENT AREAS. 2-4 The comptroller shall determine strategic investment areas on an 2-5 annual basis using the most current available data and shall 2-6 publish a list and map of strategic investment areas by September 1 2-7 of each year. 2-8 Sec. 171.727. BIENNIAL REPORT TO LEGISLATURE BY COMPTROLLER. 2-9 (a) Before the beginning of each regular session of the 2-10 legislature, the comptroller shall submit to the members of the 2-11 legislature a report that states: 2-12 (1) the total amount of expenses and payments incurred 2-13 by corporations that claim a credit under Section 171.723; 2-14 (2) the total amount of credits applied against the 2-15 tax under this chapter and the amount of unused credits; 2-16 (3) the geographical distribution of expenses and 2-17 payments giving rise to a credit authorized by this subchapter; 2-18 (4) the impact of the credit provided by this 2-19 subchapter on the amount of research and development performed in 2-20 this state and employment in research and development in this 2-21 state; and 2-22 (5) the impact of the credit provided under this 2-23 subchapter on employment, capital investment, and personal income 2-24 in this state and on state tax revenues. 2-25 (b) The final report issued prior to the expiration of this 2-26 subchapter shall include historical information on the credit 2-27 authorized under this subchapter. 2-28 (c) The comptroller may not include in the report 2-29 information that is confidential by law. 2-30 (d) For purposes of this section, the comptroller may 2-31 require a corporation that claims a credit under this subchapter to 2-32 submit information, on a form provided by the comptroller on the 2-33 location of the corporation's research expenses and payments in 2-34 this state and any other information necessary to complete the 2-35 report required under this section. 2-36 Sec. 171.728. COMPTROLLER POWERS AND DUTIES. The 2-37 comptroller shall adopt rules and forms necessary to implement this 2-38 subchapter. 2-39 Sec. 171.729. EXPIRATION. (a) This subchapter expires 2-40 December 31, 2009. 2-41 (b) The expiration of this subchapter does not affect the 2-42 carryforward of a credit under Section 171.725 for those credits to 2-43 which a corporation is eligible before the date this subchapter 2-44 expires. 2-45 SECTION 2. Chapter 171, Tax Code, is amended by adding 2-46 Subchapter P to read as follows: 2-47 SUBCHAPTER P. TAX CREDITS FOR CERTAIN JOB CREATION ACTIVITIES 2-48 Sec. 171.751. DEFINITIONS. In this subchapter: 2-49 (1) "Central administrative offices" means an 2-50 establishment primarily engaged in performing management or support 2-51 services for other establishments of the same enterprise. An 2-52 enterprise consists of all establishments having more than 50 2-53 percent common direct or indirect ownership. 2-54 (2) "County average weekly wage" means the average 2-55 weekly wage for all covered employment in the county as computed by 2-56 the Texas Workforce Commission. 2-57 (3) "Data processing" means an establishment primarily 2-58 engaged in activities described in categories 7371-7379 of the 1987 2-59 Standard Industrial Classification Manual published by the federal 2-60 Office of Management and Budget. 2-61 (4) "Distribution" means an establishment primarily 2-62 engaged in activities described in categories 5012-5199 of the 1987 2-63 Standard Industrial Classification Manual published by the federal 2-64 Office of Management and Budget. 2-65 (5) "Group health benefit plan" means: 2-66 (A) a health plan provided by a health 2-67 maintenance organization established under the Texas Health 2-68 Maintenance Organization Act (Chapter 20A, Vernon's Texas Insurance 2-69 Code); 3-1 (B) a health benefit plan approved by the 3-2 commissioner of insurance; or 3-3 (C) a self-funded or self-insured employee 3-4 welfare benefit plan that provides health benefits and is 3-5 established in accordance with the Employee Retirement Income 3-6 Security Act of 1974 (29 U.S.C. Section 1001 et seq.), as amended. 3-7 (6) "Manufacturing" means an establishment primarily 3-8 engaged in activities described in categories 2011-3999 of the 1987 3-9 Standard Industrial Classification Manual published by the federal 3-10 Office of Management and Budget. 3-11 (7) "Qualified business" means an establishment 3-12 primarily engaged in central administrative offices, distribution, 3-13 data processing, manufacturing, research and development, or 3-14 warehousing. 3-15 (8) "Qualifying job" means a new permanent full-time 3-16 job that: 3-17 (A) is located in a strategic investment area; 3-18 (B) requires at least 1,600 hours of work a 3-19 year; 3-20 (C) pays at least 110 percent of the county 3-21 average weekly wage for the county where the job is located; 3-22 (D) is covered by a group health benefit plan 3-23 for which the business pays at least 80 percent of the premiums or 3-24 other charges assessed under the plan for the employee; 3-25 (E) is not transferred from one area in this 3-26 state to another area in this state; and 3-27 (F) is not created to replace a previous 3-28 employee. 3-29 (9) "Research and development" means an establishment 3-30 primarily engaged in activities described in category 8731 of the 3-31 1987 Standard Industrial Classification Manual published by the 3-32 federal Office of Management and Budget. 3-33 (10) "Strategic investment area" has the meaning 3-34 assigned that term by Section 171.721. 3-35 (11) "Warehousing" means an establishment primarily 3-36 engaged in activities described in categories 4221-4226 of the 1987 3-37 Standard Industrial Classification Manual published by the federal 3-38 Office of Management and Budget. 3-39 Sec. 171.752. ELIGIBILITY. (a) A corporation is eligible 3-40 for a credit against the tax imposed under this chapter if the 3-41 corporation: 3-42 (1) is a qualified business as defined in Section 3-43 171.751; 3-44 (2) creates a minimum of 10 qualifying jobs; and 3-45 (3) pays an average weekly wage, for the year in which 3-46 credits are claimed, of at least 110 percent of the county average 3-47 weekly wage for the county where the qualifying jobs are located. 3-48 (b) A corporation may claim a credit or take a carryforward 3-49 credit without regard to whether the county in which it created the 3-50 qualifying jobs subsequently loses its designation as a strategic 3-51 investment area. 3-52 Sec. 171.753. CALCULATION OF CREDIT. A corporation may 3-53 establish a credit equal to 25 percent of the total wages and 3-54 salaries paid by the corporation for qualifying jobs during the 3-55 period upon which the tax is based. 3-56 Sec. 171.754. LENGTH OF CREDIT. The credit established 3-57 shall be claimed in five equal installments of one-fifth the credit 3-58 amount over the five consecutive reports beginning with the report 3-59 based upon the period during which the qualifying jobs were 3-60 created. 3-61 Sec. 171.755. LIMITATIONS. (a) The total credit claimed 3-62 under this subchapter for a report, including the amount of any 3-63 carryforward credit under Section 171.756, may not exceed 50 3-64 percent of the amount of franchise tax due for the report before 3-65 any other applicable tax credits. 3-66 (b) The total credit claimed under this subchapter and 3-67 Subchapters O and Q for a report, including the amount of any 3-68 carryforward credits, may not exceed the amount of franchise tax 3-69 due for the report after any other applicable credits. 4-1 (c) A corporation that establishes its eligibility for a 4-2 credit under this subchapter is not eligible to establish a credit 4-3 under Subchapter O. 4-4 Sec. 171.756. CARRYFORWARD. (a) If a corporation is 4-5 eligible for a credit from an installment that exceeds the 4-6 limitations under Section 171.755(a) or (b), the corporation may 4-7 carry the unused credit forward for not more than five consecutive 4-8 reports. 4-9 (b) A carryforward is considered the remaining portion of an 4-10 installment that cannot be claimed in the current year because of 4-11 the tax limitation under Section 171.755. A carryforward is added 4-12 to the next year's installment of the credit in determining the tax 4-13 limitation for that year. A credit carryforward from a previous 4-14 report is considered to be utilized before the current year 4-15 installment. 4-16 Sec. 171.757. CERTIFICATION OF ELIGIBILITY. (a) For the 4-17 initial and each succeeding report in which a credit is claimed 4-18 under this subchapter, the corporation shall file with its report, 4-19 on a form provided by the comptroller, information that 4-20 sufficiently demonstrates that the corporation is eligible for the 4-21 credit and is in compliance with Section 171.752. 4-22 (b) The burden of establishing entitlement to and the value 4-23 of the credit is on the corporation. 4-24 (c) If, in one of the five years in which the installment of 4-25 a credit accrues, the number of the corporation's full-time 4-26 employees falls below the number of full-time employees the 4-27 corporation had in the year in which the corporation qualified for 4-28 the credit, the credit expires and the corporation may not take any 4-29 remaining installment of the credit. 4-30 (d) Notwithstanding Subsection (c), the corporation may, 4-31 however, take the portion of an installment that accrued in a 4-32 previous year and was carried forward to the extent permitted under 4-33 Section 171.756. 4-34 Sec. 171.758. ASSIGNMENT PROHIBITED. A corporation may not 4-35 convey, assign, or transfer the credit allowed under this 4-36 subchapter to another entity unless all of the assets of the 4-37 corporation are conveyed, assigned, or transferred in the same 4-38 transaction. 4-39 Sec. 171.759. BIENNIAL REPORT TO LEGISLATURE BY COMPTROLLER. 4-40 (a) Before the beginning of each regular session of the 4-41 legislature, the comptroller shall submit to the members of the 4-42 legislature a report that states: 4-43 (1) the total number of jobs created by corporations 4-44 that claim a credit under this subchapter and the average annual 4-45 wage of those jobs; 4-46 (2) the total amount of credits applied against the 4-47 tax under this chapter and the amount of unused credits; 4-48 (3) the breakdown of the type of qualified businesses 4-49 that claim a credit under this subchapter; 4-50 (4) the geographical distribution of the credits 4-51 claimed under this subchapter; and 4-52 (5) the impact of the credit provided under this 4-53 subchapter on employment, personal income, and capital investment 4-54 in this state and on state tax revenues. 4-55 (b) The final report issued prior to the expiration of this 4-56 subchapter shall include historical information on the credit 4-57 authorized under this subchapter. 4-58 (c) The comptroller may not include in the report 4-59 information that is confidential by law. 4-60 (d) For purposes of this section, the comptroller may 4-61 require a corporation that claims a credit under this subchapter to 4-62 submit information, on a form provided by the comptroller, on the 4-63 location of the corporation's job creation in this state and any 4-64 other information necessary to complete the report required under 4-65 this section. 4-66 Sec. 171.760. COMPTROLLER POWERS AND DUTIES. The 4-67 comptroller shall adopt rules and forms necessary to implement this 4-68 subchapter. 4-69 Sec. 171.761. EXPIRATION. (a) This subchapter expires 5-1 December 31, 2009. 5-2 (b) The expiration of this subchapter does not affect the 5-3 carryforward of a credit under Section 171.756 or those credits for 5-4 which a corporation is eligible before the date this subchapter 5-5 expires. 5-6 SECTION 3. Chapter 171, Tax Code, is amended by adding 5-7 Subchapter Q to read as follows: 5-8 SUBCHAPTER Q. TAX CREDITS FOR CERTAIN CAPITAL INVESTMENTS 5-9 Sec. 171.801. DEFINITIONS. In this subchapter: 5-10 (1) "Central administrative offices," "county average 5-11 weekly wage," "distribution," "data processing," "manufacturing," 5-12 "qualified business," "research and development," and "warehousing" 5-13 have the meanings assigned those terms by Section 171.751. 5-14 (2) "Capitalized lease" means a transaction that is 5-15 classified as a purchase for federal income tax purposes even 5-16 though it is denominated as a "lease." 5-17 (3) "Qualified capital investment" means tangible 5-18 personal property first placed in service in a strategic investment 5-19 area and that is described in Section 1245(a), Internal Revenue 5-20 Code, such as engines, machinery, tools, and implements used in a 5-21 trade or business or held for investment and subject to an 5-22 allowance for depreciation, cost recovery under the accelerated 5-23 cost recovery system, or amortization. The term does not include 5-24 real property or buildings and their structural components. 5-25 Property that is leased under a capitalized lease is considered a 5-26 "qualified capital investment," but property that is leased under 5-27 an operating lease is not considered a "qualified capital 5-28 investment." Property expensed under Section 179, Internal Revenue 5-29 Code, is not considered a "qualified capital investment." 5-30 (4) "Strategic investment area" has the meaning 5-31 assigned that term by Section 171.721. 5-32 Sec. 171.802. ELIGIBILITY. (a) A corporation is eligible 5-33 for a credit against the tax imposed under this chapter in the 5-34 amount and under the conditions and limitations provided by this 5-35 subchapter. 5-36 (b) To qualify for the credit authorized under this 5-37 subchapter, a qualified business must: 5-38 (1) make a minimum $500,000 qualified capital 5-39 investment; and 5-40 (2) pay an average weekly wage, at the location with 5-41 respect to which the credit is claimed, which is at least 110 5-42 percent of the county average weekly wage. 5-43 (c) A corporation may claim a credit or take a carryforward 5-44 credit without regard to whether the county in which it made the 5-45 qualified capital investment subsequently loses its designation as 5-46 a strategic investment area. 5-47 Sec. 171.803. CALCULATION OF CREDIT. A corporation may 5-48 establish a credit equal to 7.5 percent of the qualified capital 5-49 investment during the period upon which the tax is based. 5-50 Sec. 171.804. LENGTH OF CREDIT. The credit established 5-51 shall be claimed in five equal installments of one-fifth the credit 5-52 amount over the five consecutive reports beginning with the report 5-53 based upon the period during which the qualified capital investment 5-54 was made. 5-55 Sec. 171.805. LIMITATIONS. (a) The total credit claimed 5-56 under this subchapter for a report, including the amount of any 5-57 carryforward credit under Section 171.806, may not exceed 50 5-58 percent of the amount of franchise tax due for the report before 5-59 any other applicable tax credits. 5-60 (b) The total credit claimed under this subchapter and 5-61 Subchapters O and P for a report, including the amount of any 5-62 carryforward credits, may not exceed the amount of franchise tax 5-63 due for the report after any other applicable tax credits. 5-64 (c) A corporation that establishes its eligibility for a 5-65 credit under this subchapter is not eligible to claim a franchise 5-66 tax reduction authorized under Section 171.1015. 5-67 Sec. 171.806. CARRYFORWARD. (a) If a corporation is 5-68 eligible for a credit from an installment that exceeds the 5-69 limitation under Section 171.805(a) or (b), the corporation may 6-1 carry the unused credit forward for not more than five consecutive 6-2 reports. 6-3 (b) A carryforward is considered the remaining portion of an 6-4 installment that cannot be claimed in the current year because of 6-5 the tax limitation under Section 171.805. A carryforward is added 6-6 to the next year's installment of the credit in determining the tax 6-7 limitation for that year. A credit carryforward from a previous 6-8 report is considered to be utilized before the current year 6-9 installment. 6-10 Sec. 171.807. CERTIFICATION OF ELIGIBILITY. (a) For the 6-11 initial and each succeeding report in which a credit is claimed 6-12 under this subchapter, the corporation shall file with its report, 6-13 on a form provided by the comptroller, information that 6-14 sufficiently demonstrates that the corporation is eligible for the 6-15 credit and is in compliance with Section 171.802. 6-16 (b) The burden of establishing entitlement to and the value 6-17 of the credit is on the qualified business. 6-18 (c) A credit expires under this subchapter and the 6-19 corporation may not take any remaining installment of the credit if 6-20 in one of the five years in which the installment of a credit 6-21 accrues, the qualified business: 6-22 (1) disposes of the qualified capital investment; 6-23 (2) takes the qualified capital investment out of 6-24 service; 6-25 (3) moves the qualified capital investment out of this 6-26 state; or 6-27 (4) fails to pay an average weekly wage as required by 6-28 Section 171.802. 6-29 (d) Notwithstanding Subsection (c), the corporation may take 6-30 the portion of an installment that accrued in a previous year and 6-31 was carried forward to the extent permitted under Section 171.806. 6-32 Sec. 171.808. ASSIGNMENT PROHIBITED. A corporation may not 6-33 convey, assign, or transfer the credit allowed under this 6-34 subchapter to another entity unless all of the assets of the 6-35 corporation are conveyed, assigned, or transferred in the same 6-36 transaction. 6-37 Sec. 171.809. BIENNIAL REPORT TO LEGISLATURE BY COMPTROLLER. 6-38 (a) Before the beginning of each regular session of the 6-39 legislature, the comptroller shall submit to the members of the 6-40 legislature a report that states: 6-41 (1) the total amount of qualified capital investments 6-42 made by corporations that claim a credit under this subchapter; 6-43 (2) the total amount of credits applied against the 6-44 tax under this chapter and the amount of unused credits; 6-45 (3) the geographical distribution of the qualified 6-46 capital investments upon which tax credit claims are made under 6-47 this subchapter; and 6-48 (4) the impact of the credit provided under this 6-49 subchapter on employment, capital investment, personal income, and 6-50 state tax revenues. 6-51 (b) The final report issued prior to the expiration of this 6-52 subchapter shall include historical information on the credit 6-53 authorized under this subchapter. 6-54 (c) The comptroller may not include in the report 6-55 information that is confidential by law. 6-56 (d) For purposes of this section, the comptroller may 6-57 require a corporation that claims a credit under this subchapter to 6-58 submit information, on a form provided by the comptroller, on the 6-59 location of the corporation's capital investment in this state and 6-60 any other information necessary to complete the report required 6-61 under this section. 6-62 Sec. 171.810. COMPTROLLER POWERS AND DUTIES. The 6-63 comptroller shall adopt rules and forms necessary to implement this 6-64 subchapter. 6-65 Sec. 171.811. EXPIRATION. (a) This subchapter expires 6-66 December 31, 2009. 6-67 (b) The expiration of this subchapter does not affect the 6-68 carryforward of a credit under Section 171.806 or those credits for 6-69 which a corporation is eligible before the date this subchapter 7-1 expires. 7-2 SECTION 4. The comptroller of public accounts of the State 7-3 of Texas may combine the reports required under Subchapters O, P, 7-4 and Q, Chapter 171, Tax Code, as added by this Act, into a single 7-5 report. 7-6 SECTION 5. (a) This Act takes effect January 1, 2000. 7-7 (b) The changes in law made by this Act apply only to a 7-8 report originally due on or after January 1, 2000. A corporation 7-9 may claim a credit under Subchapters O, P, and Q, Chapter 171, Tax 7-10 Code, as added by this Act, only for expenses and payments 7-11 incurred, qualified investments made, or new jobs created, on or 7-12 after January 1, 2000. 7-13 SECTION 6. The importance of this legislation and the 7-14 crowded condition of the calendars in both houses create an 7-15 emergency and an imperative public necessity that the 7-16 constitutional rule requiring bills to be read on three several 7-17 days in each house be suspended, and this rule is hereby suspended. 7-18 * * * * *