| Date: | 11/21/2008 |
|---|---|
| Organization: | Massachusetts Department of Revenue |
| Referenced Sources: | Massachusetts General Laws |
Corporate/Personal Income Tax/Sales and Use
I. Introduction
On June 16, 2008, Governor Deval Patrick signed "An Act Providing for the Investment in and Expansion of the Life Sciences Industry in the Commonwealth" (the Act). St. 2008, c. 130. The goal of the Act is to expand employment in the life sciences sector in Massachusetts and to promote health-related innovations by supporting research, development, manufacturing and commercialization in the life sciences. [1]
The Act establishes the Life Sciences Investment Program as well as the Life Sciences Tax Incentive Program pursuant to chapter 23I of the General Laws. See St. 2008, c. 130, § 13, codified at G.L. c. 23I, § 5(a), (d), respectively. It provides for a one billion dollar investment in the life sciences sector, including $25 million each year for 10 years for the Massachusetts Life Sciences Investment Fund established by G.L. c. 23I, § 6 (subject to yearly appropriation by the Massachusetts Legislature), and $25 million each year for 10 years in various tax incentives for qualifying life sciences companies on a competitive basis (subject to required authorizations by the Massachusetts Life Sciences Center and to approval by the Secretary of Administration and Finance). These incentives are effective from January 1, 2009 through December 31, 2018. St. 2008, c.130, §§ 52-54.
This technical information release (TIR) summarizes the tax incentives available to certified life sciences companies through the Life Sciences Tax Incentive Program and generally explains what follow-up guidance the Department of Revenue intends to issue concerning these incentives. The Commissioner of Revenue is responsible for promulgating public written statements including regulations, rulings, technical information releases and directives, as well as other materials governing the administration of the life sciences tax incentives offered pursuant to chapters 62, 63, 64H and 64I of the General Laws.
II. Overview
In general, the Act authorizes the Massachusetts Life Sciences Center (the Center), to review and, as appropriate, approve applications from "life sciences companies" for specified tax benefits, which are described subsequently in this TIR. Further information may be found on the Center's website, http://www.masslifesciences.com/incentive.html. A life sciences company is defined asa business corporation, partnership, firm, unincorporated association or other entity engaged in life sciences research, development, manufacturing or commercialization in the Commonwealth, and any affiliate thereof, which is, or the members of which are, subject to taxation under chapters 62, 63, 64H or 64I. G.L. c. 23I, § 2.
The Center, established pursuant to G.L. c. 23I, § 3, is responsible for administering the Life Sciences Investment and Tax Incentive Programs and certifying a company as a "certified life sciences company". G.L. c. 23I, § 5. Upon timely receipt of a certification proposal containing the information required by G.L. c. 23I, § 5(b), and before certification for purposes of tax benefits, the Center must provide an estimate to the Secretary of Administration and Finance of the tax cost of extending benefits to a proposed project, as approved by the Commissioner of Revenue. Tax incentives are available only to a certified life sciences company and only to the extent that the incentives are both (i) authorized by the Center under the Life Sciences Tax Incentive Program and (ii) expressly granted by the Secretary of Administration and Finance. G.L. c. 23I, § 5(d). Certification as a "certified life sciences company" pursuant to G.L. c. 23I, § 5(b) is valid for 5 years starting with the tax year in which certification is granted. G.L. c. 23I, § 5(e). A certified company must file an annual report with the Center detailing whether it has met the specific targets established in its certification proposal, pursuant to G.L. c. 23I, § 5(b)(i)(A), (e).
Pursuant to the Life Sciences Tax Incentive Program, the Center, in consultation with the Commissioner of Revenue, may annually authorize tax incentives to certified life sciences companies, including incentives carried forward, refunded or transferred, in accordance with various provisions of chapters 62, 63, 64H and 64I of the General Laws as amended or added by St. 2008, c. 130. The Act specifies that the cumulative amount of tax incentives, including the current year cost of incentives allowed in previous years is limited to $25 million annually. See G.L. c. 23I, § 5(d). The Center may, in consultation with the Commissioner of Revenue, limit any incentive or incentives to a specific dollar amount or time duration, or in any other manner deemed appropriate by the Commissioner. G.L. c. 23I, § 5(d).
The value of any tax incentive awarded under the Life Sciences Tax Incentive Program established under G.L. c. 23I, § 5(d) which extends beyond December 31, 2018, including carry-forwards of losses or credits, must be taken into account during the year awarded and the full amount of such tax benefits potentially realized in periods after December 31, 2018 must be counted against the annual ceilings for years ending prior to January 1, 2019. St. 2008, c. 130, § 49. Tax incentives authorized and granted pursuant to the Life Sciences Tax Incentive Program count toward the $25,000,000 annual ceiling only if they are not otherwise available to a taxpayer. St. 2008, c. 130, § 49.
The Act also contains procedures for revocation of certification, and provisions regarding denial and recapture of tax benefits, if the Center determines that representations made by a certified life sciences company in its certification proposal are materially at variance with the conduct of the life sciences company after receiving certification. See G.L. c. 23I, § 5(e). In such a case, revocation of certification is effective on the first day of the tax year in which the Center determines that a material variance commenced. In the event of revocation of certification by the Center, the Commissioner of Revenue will, as of the effective date of the revocation, disallow any credits, exemptions, or other tax benefits allowed by the original certification. In addition, the Commissioner will issue regulations concerning recapture of the value of tax benefits; in that regard, the statute directs that (i) recapture provisions of existing law with respect to investment tax credits shall apply, and (ii) where a sales and use tax exemption had been granted, the purchaser shall accrue use tax as of the date of revocation on a portion of the sales price that is proportionate to the remaining useful life of the property purchased. G.L. c. 23I, § 5(e)(3). Recapture may also apply with regard to other tax benefits.
III. Summary of Tax Incentives
1. Life Sciences Investment Tax Credit (ITC)
For taxable years beginning on or after January 1, 2009, the Act adds a new investment tax credit to the personal income tax and the corporate excise. St. 2008, c. 130, §§ 17, 30 and 53, codified at G.L. c. 62, § 6(m) and c. 63, § 38U. This credit, which is available to certified life sciences companies or persons only to the extent authorized pursuant to the Life Sciences Tax Incentive Program, is equal to 10% of the cost of qualifying property acquired, constructed, reconstructed or erected during the taxable year and used exclusively in the Commonwealth. The refundable ITC can apply to purchases made on or after January 1, 2009 even if a construction project started before that date. The scope of "qualifying property" for purposes of the new credit is the same as that provided by the existing investment tax credit under c. 63, § 31A. Life sciences companies or persons also qualifying for the economic opportunity area (EOA) credit under G.L. c. 62, § 6(g) or c. 63, § 38N for the same property may only take such EOA credit to the extent of an additional 2% of the cost of the qualifying property. Corporations taking these credits are not allowed to take the investment tax credit under c. 63, § 31A or the low income housing credit under c. 63, § 31H.
If a life sciences investment tax credit exceeds the tax otherwise due under the personal income tax or the corporate excise, as applicable, 90 percent of the balance of such credit may, at the option of the taxpayer and to the extent authorized pursuant to the Life Sciences Tax Incentive Program, be refundable to the taxpayer for the tax year in which the qualified property giving rise to such credit is placed in service. If such refund is elected by the taxpayer, then the carryover provisions for this credit that would otherwise apply shall not be available.
In the event of revocation of a company's certification as a life sciences company, the recapture provisions set out inc. 62, § 6(m) and c. 63, § 38U shall apply.
2. FDA User Fees Credit
For taxable years beginning on or after January 1, 2009, the Act adds to the personal income tax and the corporate excise a new credit for user fees paid on or after the effective date of the Act (June 16, 2008) to the U. S. Food and Drug Administration (U.S.F.D.A.) upon submission of an application to manufacture a human drug in the Commonwealth. St. 2008, c. 130, §§ 17, 21 51, and 53, codified at G.L. c. 62, § 6(n) and c. 63, § 31M. This credit, which is available to certified life sciences companies or persons only to the extent authorized pursuant to the Life Sciences Tax Incentive Program, is equal to 100% of the user fees actually paid by the taxpayer, as specified in the certification, and may be claimed in the taxable year in which the application for licensure of an establishment to manufacture the drug is approved by the U.S.F.D.A. To be eligible for the credit, more than 50% of the research and development costs for the drug must have been incurred in Massachusetts.
Chapter 62 and chapter 63 taxpayers may use the FDA user fees credit to reduce their tax to zero. To the extent authorized pursuant to the Life Sciences Tax Incentive Program, 90% of the balance of credits remaining is refundable. The deduction otherwise allowable for user fees qualifying for the credit is disallowed.
3. Extension of Net Operating Losses (NOLs) from 5 to 15 years
For taxable years beginning on or after January 1, 2009, the Act adds to chapter 63 a new provision allowing a certified life sciences company to carry forward losses for up to 15 years (in lieu of the current 5-year carry-forward) to the extent authorized pursuant to the Life Sciences Tax Incentive Program. St. 2008, c. 130, §§ 19 and 53, codified at G.L. c. 63, § 30.17. Losses that may be eligible for this extended carry-forward will include only current losses and carryover losses which, as of January 1, 2009, or the date of certification, whichever is later, are unexpired from previous years and eligible to be carried forward. However, the extended carry-forward that may be authorized for such losses must be reduced by the number of any years prior to the date of certification for which the losses were carried over. For example, if an extended NOL carry-forward is granted in 2009 with respect to a carryover loss that exists on January 1, 2009 from a loss that was incurred in 2006, the allowable carry-forward for this loss is limited to a maximum of 13 years from January 1, 2009, since two years of carryover (2007 and 2008) would have already concluded.
4. Elimination of the Throwback Provision in the Sales Factor Used in Apportioning Corporate Income
For taxable years beginning on or after January 1, 2009, the Act adds to c. 63, § 38(f) a provision permitting, to the extent authorized pursuant to the Life Sciences Tax Incentive Program, a certified life sciences company to be deemed to be taxable in the state of its purchaser if the property purchased is delivered or shipped to another state. St. 2008, c. 130, §§ 24 and 53, codified at G.L. c. 63, § 38(f), ¶ 3, (6). This treatment would preclude such sales from being counted in the numerator of the sales factor of the corporate apportionment formula.
5. § 38M Research Credit Refundable
For taxable years beginning on or after January 1, 2009, the Act adds a new subsection to c. 63, § 38M making the research credit refundable for a certified life sciences company or person, to the extent authorized pursuant to the Life Sciences Tax Incentive Program. St. 2008, c. 130, §§ 28 and 53, codified at G.L. c. 63, § 38M(j). If the research credit exceeds the amount that may be claimed under § 38M for a taxable year, at the option of the taxpayer and to the extent authorized under the Life Sciences Tax Incentive Program, 90% of the balance of the credit may be refunded. Unexpired research credit carryforwards from 2008 and earlier years can be made refundable in 2009 and thereafter.
6. Life Sciences Research Credit
For taxable years beginning on or after January 1, 2009, the Act adds a new life sciences research credit, to the extent authorized for certified life sciences companies pursuant to the Life Sciences Tax Incentive Program, to provide qualifying companies with a means to obtain a research credit for certain expenditures not qualifying for the existing research credit under c. 63, § 38M. St. 2008, c. 130, §§ 30 and 53, codified at G.L. c. 63, § 38W. Under this new provision, the credit is generally calculated in the same manner as the research credit under § 38M. However, the qualified research expenditures which form the basis for the calculation in new § 38W differ from those of § 38M in that they can qualify when the activities are performed both inside and outside of the Commonwealth, to the extent they relate to legally mandated clinical trial activities. The credit can reduce the corporate excise to the minimum excise of $ 456 and may be carried forward for 15 years. Unlike the regular research credit, as amended by the new subsection (j) of § 38M, described above, the new life sciences research credit under G.L. c. 63, § 38W is not refundable.
7. Deduction for Qualified Clinical Testing Expenses for Orphan Drugs
For taxable years beginning on or after January 1, 2009, the Act adds a new section to chapter 63 that allows a Massachusetts deduction for qualified clinical expenses for certain drugs for rare diseases or conditions. St. 2009, c. 130, §§ 30 and 53, codified at G.L. c. 63, § 38V. A certified life sciences company, to the extent authorized under the Life Sciences Tax Incentive Program, is allowed a deduction under c. 63, § 30.4 for that portion of these expenses paid or incurred for the taxable year that equal the amount of the credit allowable for the taxable year under § 45C of the Internal Revenue Code and otherwise disallowed as a deduction under § 280C(b) of the Code.
8. Life Sciences Companies Deemed to be Research and Development Corporations for Sales Tax Purposes
For taxable years beginning from January 1, 2009 until December 31, 2018, to the extent authorized pursuant to the Life Sciences Tax Incentive Program established by G.L. c. 23I, § 5, a certified life sciences company may be deemed a research and development corporation for purposes of the sales and use tax exemptions under G.L. c. 64H, §§ 6(r) and (s) for materials, tools, fuels and machinery used in research and development. See St. 2008, c. 130, § 32, amending G.L. c. 63, § 42B.
A certified life sciences company, to the extent that it is authorized to claim sales tax exemptions as a deemed research and development corporation, is eligible for these exemptions regardless of whether it meets the requirements for qualification as a research and development corporation set forth in G.L. c. 63, § 42B or in the Research and Development regulation, 830 CMR 64H.6.4.
9. Sales Tax Exemptions for Property for Use in the Development of Certain Facilities and Utility Systems
For tax periods beginning on or after January 1, 2009, the Act adds to G.L. c. 64H, § 6 a new provision granting a sales tax exemption for certain tangible personal property purchased for a certified life sciences company, to the extent authorized pursuant to the Life Sciences Tax Incentive Program established by G.L. c. 23I, § 5. St. 2008, c. 13, § 34, codified at G.L. c. 64H, § 6(xx). This provision exempts, to the extent authorized under the tax incentive program,sales of tangible personal property purchased for a certified life sciences company for use in connection with the construction, alteration, remodeling, repair or remediation of research, development or manufacturing facilities and utility support systems. For purposes of this exemption, unless the context clearly requires otherwise, the term "utility support systems" means all areas of utility support systems including, but not limited to, site, civil, mechanical, electrical and plumbing systems.
The exemption applies to purchases made on or after the effective date of the Act (June 16, 2008), to the extent authorized under the Life Sciences Tax Incentive Program. St. 2008, c. 130, § 50. In the event of revocation of a company's certification as a life sciences company, if a company had been granted sales and use tax exemptions pursuant to G.L. c. 64H, § 6(xx), the purchaser will accrue use tax as of the date of revocation on a portion of the sales price on which exemption is claimed that is proportionate to the remaining useful life of the property. G.L. c. 23I, § 5(e)(3).
III. Further guidance
The Department intends to issue regulations and other guidance as necessary and appropriate for the administration of the Life Sciences Tax Incentive Program. Such guidance will address, among other items, the life sciences research credit under G.L. c. 63, § 38M and the new research credit established under G.L. c. 63, § 38W, the life sciences investment tax credit established under G.L. c. 62, § 6(m) and G.L. c. 63, § 38U, including (i) adjustment of intercompany prices and elimination of intercompany transactions and provisions to prevent generation of multiple credits with respect to the same property, and (ii) recapture of the value of credits, exemptions, or other tax benefits allowed under a certification in the event that a taxpayer's certification as a life sciences company is revoked under G.L. c. 23I, § 5(e).
/s/Navjeet K. Bal
Navjeet K. Bal
Commissioner of Revenue
NKB:MTF:wrd
November 21, 2008
TIR 08-23