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F I S C A L I M P A C T R E P O R T

SPONSOR Beffort

DATE TYPED 01/28/05 HB

SHORT TITLE Research & Development Business Tax Credit

SB 53

ANALYST Padilla-Jackson

REVENUE

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

($1,500.0)

($2,200)

Increasing Recurring

General Fund

($300.0)

($450.0)

Increasing Recurring Local Governments

(Parenthesis ( ) Indicate Revenue Decreases)

Duplicates: House Bill 245 (House Bill 51 is very similar)

SOURCES OF INFORMATION

LFC Files

Responses Received From

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of Bill

Senate Bill 53 provides a tax credit to small research and development businesses which would

apply to all gross receipts, compensating, or withholding taxes owed to the state. In order to

qualify as a “qualified research and development small business”, the business must employ no

more than 25 full-time employees; have total revenues of no more than $5 million in any prior

fiscal year; not have had, in any prior calendar month, more than 50 percent of its voting securi-

ties or other equity interest owned by another business; and has made qualified research expendi-

tures for the period of 12 calendar months ending with the month for which the credit is sought

of at least 20 percent of its total expenditures. In calculating the qualified research expenditures,

the business cannot include grant-funded research, property expenditures in connection with in-

dustrial revenue bonds, or property for which the taxpayer has received a Capital Equipment Tax

Credit, an Investment Credit or a Technology Jobs Tax Credit. A qualified research expendi-

ture is defined an expenditure related to qualified research, meaning research that (1) is under-

Senate Bill 53 -- Page 2

taken for the purpose of discovering information that is technological in nature and the applica-

tion of which is intended to be useful in the development of a new or improved business compo-

nent of the taxpayer; and (2) in which substantially all activities constitute elements of a process

of experimentation related to new or improved function, performance, reliability or quality, but

not related to style, taste, cosmetic, or seasonal design factors. The tax credit is available until

June 30, 2009.

This bill is being proposed on behalf of the Revenue Stabilization and Tax Policy Committee.

The effective date is July 1, 2005.

FISCAL IMPLICATIONS

The TRD fiscal impact totals -$1.8 million in FY06 and -$2.65 million in FY07. According to

the TRD analysis, tax return data indicates that there are more than 250 firms eligible for the

proposed credits. In the most recent year, TRD estimates that these firms had combined gross

receipts, withholding, and compensating tax liability – and therefore total potential credits of --

of $3.8 million. The fiscal impacts assume that a little less than half of the eligible taxpayers

take advantage of the credit in the first year ($3.9 million x 47 percent generates a $1.8 million

impact), but that the number of businesses participating increases significantly in future years.

ADMINISTRATIVE IMPLICATIONS

TRD would be responsible for providing the credit claim forms for the proposed tax credit. Ac-

cording to TRD, new forms would be needed and instructions and publications would have to be

modified. Manual review and tracking of the credit would be required. An approval process

would be needed. TRD would require 0.5 additional FTE to administer the provisions of this

bill.

OPJ/lg