34 TAC §3.578
The Comptroller of Public Accounts proposes a new §3.578,
concerning economic development credits. This new section is the result of
Tax Code, new Subchapter O, §§171.721 - 171.730, new Subchapter
P, §§171.171.751 - 171.761, and new Subchapter Q, §§171.801
- 171.811. This section provides franchise tax guidelines for eligibility
and calculation of three credits: research and development, job creation,
and capital investment. The section is in accordance with Senate Bill 441
passed by the 76th Legislature, 1999. A corporation may claim a research and
development credit, a jobs creation credit, and an investment credit only
for expenses and payments incurred, qualified investments or expenditures
made, or new jobs created in Texas on or after January 1, 2000.
James LeBas, Chief Revenue Estimator, has determined that for the first
five-year period the rule will be in effect there will be no significant revenue
impact on the state or local government.
Mr. LeBas also has determined that for each year of the first five years
the rule is in effect the public benefit anticipated as a result of enforcing
the rule will be in providing guidance to corporations desiring to claim economic
development credit on franchise tax. This rule is adopted under the Tax Code,
Title 2, and does not require a statement of fiscal implications for small
businesses. There is no significant anticipated economic cost to individuals
who are required to comply with the proposed rule.
Comments on the proposal may be submitted to Bryant K. Lomax, Manager,
Tax Policy Division, P.O. Box 13528, Austin, Texas 78711.
This new section is proposed under Tax Code, §111.002, which
provides the comptroller with the authority to prescribe, adopt, and enforce
rules relating to the administration and enforcement of the provisions of
Tax Code, Title 2.
The new section implements Tax Code, §§171.721 - 171.811.
§3.578.Economic Development Credits.
(a)
Effective dates.
(1)
A corporation may claim a research and development credit,
a jobs creation credit, or an investment credit only for expenses and payments
that the corporation has incurred, qualified investments or expenditures that
the corporation made, or new jobs that the corporation has created in Texas
on or after January 1, 2000.
(2)
These credits expire on December 31, 2009. This expiration
does not affect the carryforward or installment of a credit that was established
on a report that was due before this expiration date.
(b)
Definitions. The following words and terms, when used in
this section, shall have the following meanings, unless the context clearly
indicates otherwise.
(1)
"Agricultural processing" means activities that are described
in the 1987 Standard Industrial Classification Manual, categories 2011-2099,
2211, 2231, or 3111-3199, which the federal Office of Management and Budget
publishes. Examples include manufacturing or processing foods and beverages
for human consumption; weaving cotton and wool fabrics; and tanning, currying,
or finishing leather and leather products.
(2)
"Base amount," "basic research payment," and "qualified
research expense" have the meanings that Internal Revenue Code, §41 assigns
to those terms, except that all such payments and expenses must be for research
that is conducted within this state. Qualified research expenses include expenses
for research that the taxpayer performs, including wages for employees involved
in the research activity, costs of supplies that are used in research, and
payments to others for the use of computer time in qualified research. In
addition, qualified research expenses include a portion of the expenses for
research that other parties perform on behalf of the taxpayer. Basic research
payments include payments to qualified university or scientific organizations
for research to advance scientific knowledge that does not have a specific
commercial objective.
(3)
"Central administrative offices" means an establishment
that is primarily engaged in the performance of management or support services
for other establishments of the same enterprise. An enterprise consists of
all establishments that have more than 50% common direct or indirect ownership.
(4)
"County average weekly wage" means the average weekly wage
for all covered employment in the county as computed based on quarterly data
from the Texas Workforce Commission.
(5)
"Data processing" means activities that are described in
the 1987 Standard Industrial Classification Manual, categories 7371-7379,
which the federal Office of Management and Budget publishes. Examples include
computer programming, data processing, and other computer related services.
(6)
"Distribution" means activities that are described in the
1987 Standard Industrial Classification Manual, categories 5012-5199, which
the federal Office of Management and Budget publishes. Examples include the
wholesale distribution of durable and nondurable goods, such as motor vehicles,
furniture, lumber and other construction materials, professional and commercial
equipment, electrical goods, hardware, plumbing and heating equipment, paper
and paper products, apparel, and groceries.
(7)
"Group health benefit plan" means:
(A)
a health plan that a health maintenance organization that
is established under the Texas Health Maintenance Organization Act (Tex. Ins.
Code, Chapter 20A) provides;
(B)
a health benefit plan that the commissioner of insurance
has approved; or
(C)
a self-funded or self-insured employee welfare benefit
plan that provides health benefits and is established in accordance with the
Employee Retirement Income Security Act of 1974 (29 U.S.C. §1001 et seq.),
as amended.
(8)
"Manufacturing" means activities that are described in
the 1987 Standard Industrial Classification Manual, categories 2011-3999,
which the federal Office of Management and Budget publishes.
(9)
"Qualified business" means an establishment that is a central
administrative office or that is primarily engaged in agricultural processing,
distribution, data processing, manufacturing, research and development, or
warehousing. An establishment is a single physical location at which business
is conducted or services or industrial operations are performed.
(10)
"Qualified capital investment" means tangible personal
property that is: described in Internal Revenue Code, §1245(a), such
as engines, machinery, tools, and implements that are used in a trade or business,
or are held for investment and are subject to an allowance for depreciation,
cost recovery under the accelerated cost recovery system, or amortization;
and first placed in service in a strategic investment area, or in a Texas
county that has a population of less than 50,000, by a corporation that is
primarily engaged in agricultural processing. The term does not include real
property or buildings and their structural components. Property that is leased
under a capitalized lease is considered a "qualified capital investment,"
but property that is leased under an operating lease is not considered a "qualified
capital investment." Property that is expensed under Internal Revenue Code, §179,
is not considered a "qualified capital investment." "First placed in service"
means the first use of the property by the taxpayer. The property may have
been previously used by another taxpayer.
(11)
"Qualifying job" means a new permanent full-time job that:
(A)
is located in:
(i)
a strategic investment area; or
(ii)
a Texas county that has a population of less than 50,000,
if a business that is primarily engaged in agricultural processing creates
the job;
(B)
requires at least 1,600 hours of work a year;
(C)
pays at least 110% of the county average weekly wage for
the county where the job is located;
(D)
is covered by a group health benefit plan for which the
business pays at least 80% of the premiums for basic coverage or other charges
that are assessed under the plan for the employee;
(E)
is not transferred from one area in Texas to another area
in Texas; and
(F)
is not created to replace a job that was previously held
by another employee.
(12)
"Research and development," for the purposes of determining
whether an establishment constitutes a "qualified business" for the jobs creation
credit and the investment credit, means activities that are described in the
1987 Standard Industrial Classification Manual, category 8731, which the federal
Office of Management and Budget publishes. These activities are commercial
physical and biological research and development activities that are provided
on a contract or fee basis.
(13)
"Strategic investment area" means an area that the comptroller
has determined under Tax Code, §171.726, is:
(A)
a Texas county that has above state average unemployment,
but below state average per capita income; or
(B)
an area in Texas that is a federally designated urban enterprise
community or urban enhanced enterprise community.
(14)
"Warehousing" means activities that are described in the
1987 Standard Industrial Classification Manual, categories 4221-4226, which
the federal Office of Management and Budget publishes. Examples include public
warehousing and storage.
(c)
Strategic Investment Areas. The comptroller will determine
areas that qualify as strategic investment areas not later than October 1
of each year and will publish a list and map of the designated areas. The
designation is effective for the following calendar year for purposes of credits
that are available under this section. If at the time that the expenditures
were made, they were made in a strategic investment area, then the expenditures
will be considered in computation of the credits that this section provides,
even if the strategic investment area subsequently loses its designation as
a strategic investment area.
(d)
Information required. A corporation that claims a credit
under this section must submit all information that the comptroller requires.
(e)
Limitations.
(1)
The total research and development, jobs creation, and
investment credits that a corporation claims, including the amount of any
credit that the corporation carries forward from previous reports, may not
exceed the amount of franchise tax due for the report after any other applicable
credits.
(2)
A corporation that establishes its eligibility for a research
and development credit is not eligible to establish a jobs creation credit
for the same report.
(3)
A corporation may not convey, assign, or transfer to another
entity the credits that this section provides, unless all of the assets of
the corporation are conveyed, assigned, or transferred to the entity in the
same transaction.
(f)
Period used. The corporation must use the period upon which
earned surplus is based to determine which expenditure will be considered
in computing the credits that this section provides, even if the tax that
is due on taxable capital exceeds the tax that is due on net taxable earned
surplus.
(g)
Research and development credit.
(1)
Calculation of credit.
(A)
The credit for any report equals 5.0% (4.0% for reports
that are originally due before January 1, 2002) of the sum of:
(i)
the amount of qualified research expenses that a corporation
incurs in Texas during the period upon which net taxable earned surplus is
based in excess of the base amount for Texas (alternatively, 16% may be used
as the Texas fixed base percentage); and
(ii)
the basic research payments that are determined under
Internal Revenue Code, §41(e)(1)(A), for Texas during the period upon
which net taxable earned surplus is based.
(B)
A corporation may elect to compute the credit for qualified
research expenses that the corporation has incurred in Texas in a manner that
is consistent with the alternative incremental credit that is described in
Internal Revenue Code, §41(c)(4), but only if for the corresponding federal
tax period:
(i)
a federal election was made to compute the federal credit
under Internal Revenue Code, §41(c)(4);
(ii)
the corporation was a member of a consolidated group for
which a federal election was made under Internal Revenue Code, §41(c)(4);
or
(iii)
the corporation did not claim the federal credit under
Internal Revenue Code, §41(a)(1).
(C)
For purposes of the alternate credit computation method
in subparagraph (B) of this paragraph, the credit percentages that apply to
qualified research expenses that are described in Internal Revenue Code, §41(c)(4)(A)(i),
(ii), and (iii), are 0.41%, 0.55%, and 0.69%, respectively (or 0. 33%, 0.44%,
and 0.55%, respectively, for reports that are due before January 1, 2002).
(D)
In computing the credit under this subsection, a corporation
may multiply by two (or by 1.5 for reports that are originally due before
January 1, 2002) the amount of any qualified research expenses and basic research
payments that are made in a strategic investment area.
(E)
The corporation bears the burden of establishing entitlement
to, and the value of, a credit.
(F)
For the purposes of calculating the research and development
credit, "gross receipts," as used in Internal Revenue Code, §41, means
gross receipts as determined under Tax Code, §171.1032.
(2)
Report limitation. The total research and development credit
that a corporation may claim for a report, including the amount of any carryforward
credit under paragraph (3) of this subsection, may not exceed 50% (or 25%
for reports that are due before January 1, 2002) of the amount of franchise
tax that is due for the report before any other tax credits are applied.
(3)
Carryforward. If a corporation is eligible for a credit
that exceeds the limitations that are stated in subsection (e)(1) of this
section or paragraph (2) of this subsection, then the corporation may carry
the unused credit forward for not more than 20 consecutive reports. A credit
carryforward from a previous report must be used before the current year credit.
(h)
Jobs creation credit.
(1)
Eligibility. A corporation is eligible for a jobs creation
credit if the corporation:
(A)
is a qualified business;
(B)
creates a minimum of 10 qualifying jobs during the period
upon which net taxable earned surplus is based; and
(C)
pays an average weekly wage of at least 110% of the county
average weekly wage for the county where the qualifying jobs are located.
(2)
Calculation of credit. A corporation may establish a credit
that equals 25% of the total wages and salaries that the corporation has paid
for qualifying jobs during the period upon which net taxable earned surplus
is based.
(3)
Length of credit. A corporation shall claim the credit
established in five equal installments of one-fifth the credit amount over
the five consecutive reports beginning with the report based upon, for determining
net taxable earned surplus, the period during which the corporation created
qualifying jobs.
(4)
Report limitation. The total jobs creation credit that
a corporation claims for a report, including the amount of any carryforward
credit under paragraph (5) of this subsection, may not exceed 50% of the amount
of franchise tax that is due for the report before any other tax credits are
applied.
(5)
Carryforward. If a corporation is eligible for a credit
from an installment that exceeds the limitations that are stated in subsection
(e)(1) of this section or paragraph (4) of this subsection, then the corporation
may carry the unused credit forward for not more than five consecutive reports.
A carryforward is the remaining portion of an installment that cannot be claimed
in the current year because of the limitations that are stated in subsection
(e)(1) of this section or paragraph (4) of this subsection. A carryforward
is added to the next year's installment of the credit in determination of
the limitations for that year. A credit carryforward from a previous report
must be used before the current year installment.
(6)
Certification of eligibility. For the initial and each
succeeding report in which a jobs creation credit is claimed, the corporation
shall file with its report, on a form that the comptroller provides, information
that sufficiently demonstrates that the corporation is eligible for the credit
and is in compliance with paragraph (1) of this subsection. The corporation
bears the burden of establishing entitlement to, and the value of, the credit.
If during one of the five periods used to determine earned surplus for a report
on which an installment could be claimed, the number of the corporation's
full-time employees falls below the number of full-time employees the corporation
had during the period in which the corporation qualified for the credit, then
the credit expires and the corporation may not take any remaining installment
of the credit. The corporation may, however, take the portion of an installment
that accrued in a previous year and was carried forward, to the extent that
paragraph (5) of this subsection permits. In application of the terms of this
paragraph, for an employee to be considered a full-time employee, the employee
must be in a job that requires at least 1,600 hours of work for the corporation
each year, as subsection (b)(11)(B) of this section provides. The number of
full-time employees whom the corporation had employed during the period in
which the corporation qualified for the credit refers to the highest number
of full-time employees whom the corporation had employed during the period
in which the corporation qualified for the credit. A corporation has 90 days
to refill a position after an employee has left employment with the corporation.
For example, assume that a corporation with a calendar year accounting year
end had employed 1,010 full-time employees in calendar year 2000, including
10 qualifying jobs that the corporation had created during the year, as subsection
(b)(11)(B) of this section provides. The corporation may then claim the credit
in five equal installments over the five consecutive reports beginning with
its 2001 annual report, which report will be based upon the period during
which the qualifying jobs were created (i.e., calendar year 2000). If, for
example, during the calendar year 2002, the number of full-time employees
whom the corporation employs falls below 1,010, the credit expires, and the
corporation may not take the installments that would have been available for
the annual reports due in 2003, 2004, and 2005.
(i)
Investment credit.
(1)
Eligibility. If a corporation does not have employees who
are stationed full-time at the site of the qualified capital investment, then
"location" means the site, within the same strategic investment area, from
which the qualified capital investment is serviced. To qualify for the investment
credit, a qualified business must:
(A)
pay an average weekly wage, at the location for which the
credit is claimed, that amounts to at least 110% of the county average weekly
wage;
(B)
offer coverage by a group health benefit plan to all full-time
employees at the location for which the credit is claimed, for which the business
pays at least 80% of the premiums for basic coverage or other charges that
are assessed under the plan for the employees; and
(C)
make a minimum $500,000 qualified capital investment during
the period upon which net taxable earned surplus is based.
(2)
Calculation of credit. A corporation may establish a credit
that equals 7.5% of the qualified capital investment during the period upon
which net taxable earned surplus is based.
(3)
Length of credit. A corporation shall claim the credit
established in five equal installments of one-fifth the credit amount over
the five consecutive reports beginning with the report based upon, for determining
net taxable earned surplus, the period during which the corporation made the
qualified capital investment.
(4)
Report limitation. The total investment credit that a corporation
claims for a report, including the amount of any carryforward credit under
paragraph (5) of this subsection may not exceed 50% of the amount of franchise
tax that is due for the report before any other tax credits are applied.
(5)
Carryforward. If a corporation is eligible for a credit
from an installment that exceeds the limitations that are stated in subsection
(e)(1) of this section or paragraph (4) of this subsection, then the corporation
may carry the unused credit forward for not more than five consecutive reports.
A carryforward is the remaining portion of an installment that cannot be claimed
in the current year because of the limitations that are stated in subsection
(e)(1) of this section or paragraph (4) of this subsection. A carryforward
is added to the next year's installment of the credit in determination of
the limitations for that year. A credit carryforward from a previous report
must be used before the current year installment.
(6)
Certification of eligibility. For the initial and each
succeeding report in which an investment credit is claimed, the corporation
shall file with its report, on a form that the comptroller provides, information
that sufficiently demonstrates that the corporation is eligible for the credit
and is in compliance with paragraph (1) of this subsection. The qualified
business bears the burden of establishing entitlement to, and the value of,
the credit.
(7)
Ineligibility.
(A)
An investment credit expires and the corporation may not
take any remaining installment of the credit, (except the corporation is permitted
to take the portion of an installment that accrued in a previous year and
was carried forward pursuant to paragraph (5) of this subsection), if, during
one of the five periods used to determine earned surplus for a report on which
an installment could be claimed, the qualified business:
(i)
disposes of the qualified capital investment;
(ii)
takes the qualified capital investment out of service;
(iii)
moves the qualified capital investment out of Texas;
or
(iv)
fails to pay an average weekly wage as subparagraph (1)(A)
of this subsection provides.
(B)
For purposes of subparagraph (A)(i) - (iii) of this paragraph,
an installment may still be taken if the qualified capital investment is replaced
at the same location within 90 days with a new qualified capital investment
of equal or greater value. However, if the corporation chooses to take the
installment from the original qualified capital investment, then the corporation
would not be allowed to take the investment credit on the new qualified capital
investment. For example, assume in 2002 a calendar-year corporation made a
$600,000 qualified capital investment and took the investment credit on its
2003 and 2004 annual franchise tax reports. Then, in late 2004, the corporation
replaced an $80,000 machine, that was part of the original $600,000 qualified
capital investment, with a better $130,000 machine. The corporation may continue
to take the installments from the original $600,000 qualified capital investment,
or, if the new $130,000 machine was part of at least $500,000 of qualified
capital investments made in 2004, then the corporation may forego the installments
from the original investment and begin taking a new investment credit based
on the qualified capital investments made in 2004.
(8)
Limitation. A corporation that establishes its eligibility
for an investment credit is not eligible to claim a franchise tax reduction
that is authorized under Tax Code, §171.1015.
This agency hereby certifies that the proposal has been
reviewed by legal counsel and found to be within the agency's legal authority
to adopt.
Filed with the Office of
the Secretary of State, on June 8, 2001.
TRD-200103210
Martin Cherry
Deputy General Counsel for Tax Policy and Agency Affairs
Comptroller of Public Accounts
Earliest possible date of adoption: July 22, 2001
For further information, please call: (512) 463-4062