HBA-JRA C.S.S.B. 5 76(R)BILL ANALYSIS Office of House Bill AnalysisC.S.S.B. 5 By: Sibley Ways & Means 5/22/1999 Committee Report (Substituted) BACKGROUND AND PURPOSE Currently, Texas does not offer a tax credit for establishing a day-care center or for research and development. Texas also lacks a job creation or capital investment franchise tax credit that targets economically distressed counties. C.S.S.B. 5 authorizes an eligible corporation to claim a franchise tax credit for qualified expenditures relating to the establishment and operation of a day-care center or the purchase of child-care services for its employees. This bill also authorizes a corporation to claim a franchise tax credit on any increases in research and development expenses and payments incurred made in Texas after a specific base period. In addition, this bill provides a franchise tax credit to corporations that create new high-wage jobs or make qualified investments in machinery and equipment in economically distressed counties. RULEMAKING AUTHORITY It is the opinion of the Office of House Bill Analysis that rulemaking authority is expressly delegated to the comptroller of public accounts in SECTIONS 2, 3, and 4 (Sections 171.728, 171.760, and 171.810, Tax Code) of this bill. SECTION BY SECTION ANALYSIS SECTION 1. Amends Chapter 171, Tax Code, by adding Subchapter N, as follows: SUBCHAPTER N. TAX CREDIT FOR ESTABLISHING DAY-CARE CENTER OR PURCHASING CHILD-CARE SERVICES Sec. 171.701. DEFINITIONS. Defines "day-care center" and "family home." Sec. 171.702. CREDIT. Entitles a corporation that meets the eligibility requirements under this subchapter to a credit in the amount allowed by this subchapter against the franchise tax. Sec. 171.703. CREDIT FOR DAY-CARE CENTER AND PURCHASED CHILD CARE. (a) Authorizes a corporation to claim a credit under this subchapter only for a qualifying expenditure relating to the establishment and operation of a day-care center primarily to provide care for the children of employees of the corporation or of the corporation and one or more other entities sharing the costs of establishing and operating the center, or the purchase of child-care services that are actually provided to children of employees of the corporation at a day-care center or family home that is registered or listed with the Department of Protective and Regulatory Services under Chapter 42, Human Resources Code. (b) Sets forth the expenditures which qualify for such a credit. (c) Provides that the amount of the credit is equal to the lesser of $50,000, 50 percent of the corporation's qualifying expenditures, or the amount of the limitation provided by Section 171.705(b). (d) Entitles a corporation that shares in the cost of establishing and operating a day-care center to a credit for the qualifying expenditures made by that corporation, subject to the limitation prescribed by Subsection (c). Sec. 171.704. APPLICATION FOR CREDIT. Provides that a corporation must apply for a credit under this subchapter on or with the tax report for the period for which the credit is claimed. Provides that, if the corporation is claiming a credit for a qualifying expenditure for purchasing child-care services, the corporation must include proof that the services were actually provided to children of employees of the corporation at a day-care center or registered or listed family home. Requires the comptroller to adopt a form for the application for the credit. Provides that a corporation must use this form in applying for the credit. Sec. 171.705. PERIOD FOR WHICH CREDIT MAY BE CLAIMED. Authorizes a corporation to claim a credit under this subchapter for qualifying expenditures made during an accounting period only against the tax owed for the corresponding reporting period. Prohibits a corporation from claiming a credit in an amount that exceeds 90 percent of the amount of tax due for the report. Sec. 171.706. ASSIGNMENT PROHIBITED. Prohibits a corporation from conveying, assigning, or transferring the credit allowed under this subchapter to another entity unless all of the assets of the corporation are conveyed, assigned, or transferred in the same transaction. Sec. 171.707. BIENNIAL REPORT BY COMPTROLLER. Requires the comptroller to submit a report containing specific information to the governor, the lieutenant governor, and the speaker of the house of representatives before the beginning of each regular session of the legislature. Requires the final report issued prior to the expiration of this subchapter to include historical information on the credit authorized under this subchapter. Prohibits the comptroller from including confidential information in the report. Authorizes the comptroller to require a corporation that claims a franchise tax credit under this subchapter to submit information, on a form provided by the comptroller, on the location of the corporation's research expenses and payments in this state and any other information necessary to complete the report required under this section. SECTION 2. Amends Chapter 171, Tax Code, by adding Subchapter O, as follows: SUBCHAPTER O. TAX CREDIT FOR CERTAIN RESEARCH AND DEVELOPMENT ACTIVITIES Sec. 171.721. DEFINITIONS. Defines "base amount," "basic research payment," "qualified research expense," and "strategic investment area." Sec. 171.722. ELIGIBILITY. Provides that a corporation is eligible for a franchise tax credit in the amount and under the conditions and limitations provided by this subchapter. Authorizes a corporation to claim a credit under Section 171.723(b) or take a carryforward credit without regard to whether the strategic investment area in which it made qualified research expenses and basic research payments subsequently loses its designation as a strategic investment area. Sec. 171.723. CALCULATION OF CREDIT. Sets forth the method for calculating the credit for any report. Authorizes a corporation to elect to compute the credit for qualified research expenses incurred in this state in a manner consistent with the alternative incremental credit described in Section 41(c)(4), Internal Revenue Code, under certain conditions. Sets forth the credit percentages applicable to certain qualified research expenses for purposes of the alternate credit computation. Authorizes a corporation to double the amount of any qualified research expenses and basic research payments made in a strategic investment area as determined by the comptroller of public accounts (comptroller) under Section 171.726. Provides that the burden of establishing entitlement to and the value of the credit is on the corporation. Defines "gross receipts" for the purposes of this section. Sec. 171.724. LIMITATIONS. Prohibits the total credit claimed under this subchapter for a report from exceeding 50 percent of the amount of franchise tax due for the report before any other applicable tax credits. Prohibits the total credit claimed under Subchapters O, P, and Q for a report from exceeding the amount of franchise tax due for the report after any other credits. Provides that a corporation that establishes its eligibility for a credit under this subchapter is not eligible to establish a credit under Subchapter P. Sec. 171.725. CARRYFORWARD. Authorizes the corporation to carry the unused credit forward for not more than 20 consecutive reports, if a corporation is eligible for a credit that exceeds the limitation under Section 171.724. Provides that a credit carryforward from a previous report is considered to be utilized before the current year credit. Sec. 171.726. DETERMINATION OF STRATEGIC INVESTMENT AREAS. Requires the comptroller to determine strategic investment areas on an annual basis using the most current available data and to publish a list and map of strategic investment areas by September 1 of each year. Sec. 171.727. BIENNIAL REPORT BY COMPTROLLER. Requires the comptroller to submit a report containing specific information to the members of the legislature before the beginning of each regular session of the legislature. Requires the final report issued prior to the expiration of this subchapter to include historical information on the credit authorized under this subchapter. Prohibits the comptroller from including confidential information in the report. Authorizes the comptroller to require a corporation that claims a franchise tax credit to submit information, on a form provided by the comptroller, on the location of the corporation's research expenses and payments in this state and any other information necessary to complete the report required under this section. Sec. 171.728. COMPTROLLER POWERS AND DUTIES. Requires the comptroller to adopt rules and forms necessary to implement this subchapter. Sec. 171.729. EXPIRATION. Provides that Subchapter O expires December 31, 2009. Provides that the expiration of this subchapter does not affect the carryforward of a credit under Section 171.725 for those credits to which a corporation is eligible before the date this subchapter expires. SECTION 3. Amends Chapter 171, Tax Code, by adding Subchapter P, as follows: SUBCHAPTER P. TAX CREDITS FOR CERTAIN JOB CREATION ACTIVITIES Sec. 171.751. DEFINITIONS. Defines "agricultural processing," "central administrative offices," "county average weekly wage," "data processing," "distribution," "group health benefit plan," "manufacturing," "qualified business," "qualifying job," "research and development," "strategic investment area," and "warehousing." Sec. 171.752. ELIGIBILITY. Sets forth the conditions under which a corporation is eligible for a franchise tax credit. Authorizes a corporation to claim a credit or take a carryforward credit without regard to whether the county in which it created the qualifying jobs subsequently loses its designation as a strategic investment area. Sec. 171.753. CALCULATION OF CREDIT. Sets forth the method for calculating the credit. Sec. 171.754. LENGTH OF CREDIT. Requires the credit established to be claimed in five equal installments of one-fifth the credit amount over the five consecutive reports beginning with the report based upon the period during which the qualifying jobs were created. Sec. 171.755. LIMITATIONS. Prohibits the total credit claimed under this subchapter for a report from exceeding 50 percent of the amount of franchise tax due for the report before any other applicable tax credits. Prohibits the total credit claimed under Subchapters O, P, and Q for a report from exceeding the amount of franchise tax due for the report after any other applicable credits. Provides that a corporation that establishes its eligibility for a credit under this subchapter is not eligible to establish a credit under Subchapter O. Sec. 171.756. CARRYFORWARD. Authorizes the corporation to carry the unused credit forward for not more than five consecutive reports, if a corporation is eligible for a credit that exceeds the limitation under Section 171.755. Provides that a carryforward is considered the remaining portion of an installment that cannot be claimed in the current year because of the tax limitation under Section 171.755. Provides that a carryforward is added to the next year's installment of the credit in determining the tax limitation for that year. Provides that a credit carryforward from a previous report is considered to be utilized before the current year credit. Sec. 171.757. CERTIFICATION OF ELIGIBILITY. Requires the corporation to file with its report, on a form provided by the comptroller, information that sufficiently demonstrates that the corporation is eligible for the credit and is in compliance with Section 171.752, for the initial and each succeeding report in which a credit is claimed. Provides that the burden of establishing entitlement to and the value of the credit is on the corporation. Sets forth the condition under which the credit expires. Authorizes the corporation to take the portion of an installment that accrued in a previous year and was carried forward to the extent permitted under Section 171.756. Sec. 171.758. ASSIGNMENT PROHIBITED. Prohibits a corporation from conveying, assigning, or transferring the credit allowed under this subchapter to another entity unless all of the assets of the corporation are conveyed, assigned, or transferred in the same transaction. Sec. 171.759. BIENNIAL REPORT BY COMPTROLLER. Requires the comptroller to submit a report containing specific information to the governor, the lieutenant governor, and the speaker of the house of representatives before the beginning of each regular session of the legislature. Requires the final report issued prior to the expiration of this subchapter to include historical information on the credit authorized under this subchapter. Prohibits the comptroller from including confidential information in the report. Authorizes the comptroller to require a corporation that claims a credit under this subchapter to submit information, on a form provided by the comptroller, on the location of the corporation's job creation in this state and any other information necessary to complete the report required under this section. Requires the comptroller to provide notice to the members of the legislature that the report required under this section is available on request. Sec. 171.760. COMPTROLLER POWERS AND DUTIES. Requires the comptroller to adopt rules and forms necessary to implement this subchapter. Sec. 171.761. EXPIRATION. Provides that Subchapter P expires December 31, 2009. Provides that the expiration of this subchapter does not affect the carryforward of a credit under Section 171.756 or those credits for which a corporation is eligible before the date this subchapter expires. SECTION 4. Amends Chapter 171, Tax Code, by adding Subchapter Q, as follows: SUBCHAPTER Q. TAX CREDITS FOR CERTAIN CAPITAL INVESTMENTS. Sec. 171.801. DEFINITIONS. Defines "agricultural processing," "central administrative offices," "county average weekly wage," "data processing," "distribution," "manufacturing," "qualified business," "research and development," "warehousing," "project," "qualified capital investment," and "strategic investment area." Sec. 171.802. ELIGIBILITY. Provides that a corporation is eligible for a franchise tax credit in the amount and under the conditions and limitations provided by this subchapter. Sets forth the conditions under which a corporation is eligible for a credit. Authorizes a corporation to claim a credit or take a carryforward credit without regard to whether the county in which it made the qualified capital investment subsequently loses its designation as a strategic investment area. Sec. 171.803. CALCULATION OF CREDIT. Sets forth the method for calculating the credit. Sec. 171.804. LENGTH OF CREDIT. Requires the credit established to be claimed in five equal installments of one-fifth the credit amount over the five consecutive reports beginning with the report based upon the reporting period in which the criteria of Section 171.802(b) are first achieved. Provides that the credit includes all qualified capital investments between the date the criteria of Section 171.802(b) are first achieved and the end of that reporting period. Provides that credit for qualified capital investments made in subsequent reporting periods must also be taken in five equal installments of one-fifth of the credit amount over the five consecutive reporting periods beginning with the reporting period in which the investment is made. Sec. 171.805. LIMITATIONS. Prohibits the total credit claimed under this subchapter for a report from exceeding 50 percent of the amount of franchise tax due for the report before any other applicable tax credits. Prohibits the total credit claimed under Subchapters O, P, and Q for a report from exceeding the amount of franchise tax due for the report after any other applicable credits. Provides that a corporation that establishes its eligibility for a credit under this subchapter is not eligible to claim a franchise tax reduction authorized under Section 171.1015. Sec. 171.806. CARRYFORWARD. Authorizes the corporation to carry the unused credit forward for not more than five consecutive reports, if a corporation is eligible for a credit that exceeds the limitation under Section 171.805. Provides that a carryforward is considered the remaining portion of an installment that cannot be claimed in the current year because of the tax limitation under Section 171.805. Provides that a carryforward is added to the next year's installment of the credit in determining the tax limitation for that year. Provides that a credit carryforward from a previous report is considered to be utilized before the current year credit. Sec. 171.807. CERTIFICATION OF ELIGIBILITY. Requires the corporation to file with its report, on a form provided by the comptroller, information that sufficiently demonstrates that the corporation is eligible for the credit and is in compliance with Section 171.802, for the initial and each succeeding report in which a credit is claimed. Provides that the burden of establishing entitlement to and the value of the credit is on the qualified business. Sets forth the conditions under which the credit expires. Authorizes the corporation to take the portion of an installment that accrued in a previous year and was carried forward to the extent permitted under Section 171.806. Sec. 171.808. ASSIGNMENT PROHIBITED. Prohibits a corporation from conveying, assigning, or transferring the credit allowed under this subchapter to another entity unless all of the assets of the corporation are conveyed, assigned, or transferred in the same transaction. Sec. 171.809. BIENNIAL REPORT BY COMPTROLLER. Requires the comptroller to submit a report containing specific information to the governor, the lieutenant governor, and the speaker of the house of representatives before the beginning of each regular session of the legislature. Requires the final report issued prior to the expiration of this subchapter to include historical information on the credit authorized under this subchapter. Prohibits the comptroller from including in the report information that is confidential by law. Authorizes the comptroller to require a corporation that claims a credit under this subchapter to submit information, on a form provided by the comptroller, on the location of the corporation's capital investment in this state and any other information necessary to complete the report required under this section. Requires the comptroller to provide notice to the members of the legislature that the report required under this section is available on request. Sec. 171.810. COMPTROLLER POWERS AND DUTIES. Requires the comptroller to adopt rules and forms necessary to implement this subchapter. Sec. 171.811. EXPIRATION. Provides that Subchapter Q expires December 31, 2009. Provides that the expiration of this subchapter does not affect the carryforward of a credit under Section 171.806 or those credits for which a corporation is eligible before the date this subchapter expires. SECTION 5. Authorizes the comptroller to combine the reports required under this Act into a single report. SECTION 6. Effective date: January 1, 2000. Makes application of this Act prospective. SECTION 7. Emergency clause. COMPARISON OF ORIGINAL TO SUBSTITUTE The substitute adds a new SECTION 1, which amends Chapter 171, Tax Code, by adding Subchapter N. Proposed Subchapter N entitles an eligible corporation to a credit against the franchise tax. For a complete analysis, please see the Section-by-Section Analysis portion of this document. The substitute redesignates SECTION 1 of the original to SECTION 2 and further modifies proposed Section 171.721 (Definitions) to redefine "strategic investment area" to include an area within the state that is located in a municipality with a population of 500,000 or less, was nominated in 1998 for designation as a federal empowerment zone, and is not located in a municipality that contains a defense economic readjustment zone designated, and to include a county that is contiguous on at least three sides to a county with above state average unemployment and below state average per capita income, that has a population of less than 750, borders the Gulf of Mexico, and has been designated as the site for a spaceport. The substitute further modifies proposed Section 171.723 (Calculation of Credit) to provide that the credit for any report equals five, rather than four, percent of the sum of the excess of qualified research expenses incurred in this state during the period upon which the tax is based over the base amount for this state and the basic research payments determined under Section 41(e)(1)(A), Internal Revenue Code, for this state during the period upon which the tax is based. The substitute also authorizes a corporation to elect to compute the credit for qualified research expenses incurred in this state in a manner consistent with the alternative incremental credit described in Section 41(c)(4), Internal Revenue Code, under certain conditions and sets forth the credit percentages applicable to certain qualified research expenses for purposes of the alternate credit computation. In addition the substitute defines "gross receipts" for the purposes of this section. The substitute redesignates proposed Subsections (b) and (c) of the original to Subsections (d) and (e). The substitute modifies the original in Section 171.724, Tax Code, to prohibit the total credit claimed under this subchapter for a report from exceeding 50 percent, rather than 25 percent, of the amount of franchise tax due for the report before any other applicable tax credits. The substitute further modifies proposed Section 171.727 to change the section title to "Biennial Report by Comptroller" from "Biennial Report to Legislature by Comptroller." The substitute redesignates SECTION 2 of the original to SECTION 3 and further modifies proposed Section 171.759 to change the section title to "Biennial Report by Comptroller" from "Biennial Report to Legislature by Comptroller" and to require the comptroller to submit a report containing specific information to the governor, the lieutenant governor, and the speaker of the house of representatives, rather than the members of the legislature, before the beginning of each regular session of the legislature. In addition, the substitute requires the comptroller to provide notice to the members of the legislature that the report required under this section is available on request. The substitute redesignates SECTION 3 of the original to SECTION 4 and further modifies proposed Section 171.801 to define "project," delete the proposed definition of "capitalized lease," and redefine "qualified capital investment." The substitute further modifies proposed Section 171.802 to provides that, to qualify for the credit authorized under this subchapter, a qualified business must cover all the employees at the location with respect to which credit is claimed by a group health benefit plan, as defined by Section 171.751, for which the business pays at least 80 percent of the premiums or other charges assessed under the plan for the employees and make a minimum qualified capital investment of $500,000 or make a qualified capital investment on or after January 1, 2001, in a project located in this state that exceeds $500 million. The original bill did not provide the latter option. The substitute further modifies proposed Section 171.804 to require the credit established to be claimed in five equal installments of one-fifth the credit amount over the five consecutive reports beginning with the report based upon the reporting period in which the criteria of Section 171.802(b) are first achieved, rather than the period during which the qualified capital investment was made. The substitute also provides that the credit includes all qualified capital investments between the date the criteria of Section 171.802(b) are first achieved and the end of that reporting period. In addition, the substitute provides that credit for qualified capital investments made in subsequent reporting periods must also be taken in five equal installments of one-fifth of the credit amount over the five consecutive reporting periods beginning with the reporting period in which the investment is made. The substitute further modifies proposed Section 171.809 to change the section title to "Biennial Report by Comptroller" from "Biennial Report to Legislature by Comptroller." The substitute also requires the comptroller to submit a report containing specific information to the governor, the lieutenant governor, and the speaker of the house of representatives, rather than the members of the legislature, before the beginning of each regular session of the legislature. In addition, the substitute requires the comptroller to provide notice to the members of the legislature that the report required under this section is available on request. The substitute redesignates SECTIONS 4, 5, and 6 of the original to SECTIONS 5, 6, and 7 and makes a conforming change in redesignated SECTION 6.