BILL ANALYSIS Ó
AB 879
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Date of Hearing: May 8, 2013
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Mike Gatto, Chair
AB 879 (Bocanegra) - As Amended: April 16, 2013
Policy Committee: Revenue and
Taxation Vote: 8-0
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill creates a program to allow certain emerging technology
and biotechnology companies to transfer their net operating
losses (NOLs) to specified other companies in exchange for a
cash payment. Specifically, this bill:
1)Authorizes the California State Treasurer, in cooperation with
the Franchise Tax Board (FTB), to establish a corporation
business tax benefit certificate transfer program to allow a
qualified California company - specifically new or expanding
emerging technology and biotechnology companies meeting the
bill's criteria - to transfer their unused NOLs to other
taxpayers subject to California's corporation tax.
2)Requires the recipient taxpayer to provide private financial
assistance to the qualified company equal to at least 80% of
the amount of the surrendered NOLs.
3)Limits the total amount of transferable NOLs in any given
fiscal year to $60 million. Provides that the Treasurer shall
set aside at least $25 million of the total each fiscal year
for small qualified transferors, defined as having less than
$250,000 of available unused NOLs for transfer.
4)Provides that an otherwise qualified company is not eligible
to surrender its NOLs if the company has positive net
operating income in any of the two previous full years of
ongoing operations.
5)Directs the Treasurer, in cooperation with the FTB, to review
and approve applications of corporate taxpayers to acquire
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surrendered NOLs.
6)Ends the program, effective December 31, 2019.
FISCAL EFFECT
The FTB estimates revenue losses of $1.8 million for FY 2017-18,
$4.6 million for FY 2018-19, $5.1 million for FY 2019-20, and
$5.1 million for FY 2020-21.
COMMENTS
1)Purpose. According to the author, the biotech industry
accounts for $115 billion in revenue to the state of
California every year. The author argues given the importance
of this industry, California needs to do all it can to assist
the development and growth of new emerging technology and
biotechnology companies. Unfortunately, the author notes,
biotechnology projects generally are riskier investments
because they require a long development period before
generating revenue, in some cases 10 to 12 years. Obtaining
adequate funding to keep the company operational until it
makes a profit is difficult during these tough economic times.
The author states that to help bridge funding gaps, AB 879
will provide an innovative way for new startup biotechnology
and emerging technology companies to raise much needed capital
by allowing the sale of unused net operating losses. The sale
of net operating losses will allow startups to meet cash flow
needs, expedite growth, and improve the company's chances of
bringing a product to market. According to the author,
because early stage companies have a difficult time obtaining
funds, the sale of net operating losses may be critical to the
survival of newly formed companies.
2)Support. Proponents, including BIOCOM and the California
Healthcare Institute, argue AB 879 will allow small
biotechnology companies to transfer unused NOL credits to
other companies. Along with research and development credits,
NOLs are one of the most valuable tools the state of
California has to remain competitive with other states in the
life sciences industry, according to supporters. Proponents
note a lingering effect of the recession is the amount of
available venture capital has been significantly reduced and
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the investments tend to be in later stage companies.
Early-stage companies face the challenge of a long period of
development before approval, and have far fewer options to
access the capital needed to take a candidate from discovery
to approval, which can cost upwards of $1.2 billion, according
to some studies.
3)Background . Generally speaking, an NOL is the excess of
business deductions over gross income, or negative taxable
income, in a particular tax year. A taxpayer can use an NOL
to obtain a refund for taxes paid in the past and/or to reduce
future tax obligations. The process of using an NOL to refund
previously paid taxes is known as an NOL carry-back, whereas
the process of using an NOL to reduce future taxes is known as
a carry-forward. State and federal law provides for NOL
carry-back are not completely in conformance. Neither federal
nor state law allows taxpayers to sell NOLs, and both severely
restricts the taxpayers' ability to transfer NOLs.
4)Technology Business Tax Certificate Transfer Program: The New
Jersey Experience . In 1995, New Jersey (NJ) created a program
- the NJ Technology Business tax Certificate Transfer Program
- authorizing new and emerging technology and biotechnology
companies in NJ to transfer their unused research and
development (R&D) tax credits, as well as unused NOLs, to
other unaffiliated corporations doing business in the state.
The NJ Program is similar to one that would be created by AB
879, although the California program would not allow a sale of
R&D tax credits.
In 2010, the NJ Institute of Technology conducted an evaluation
of the NJ Program and found that the primary goal of the
program, creation of high wage and high quality jobs in New
Jersey in a cost-effective manner, was achieved only for
biotechnology companies. The study also states that the cost
of the tax transfers is less than the benefit of the NJ income
tax revenues generated by the beneficiary companies.
5)Related Legislation .
a) AB 2045 (Perea) of 2012 was similar to AB 879. AB
2045 was held on this committee's Suspense File.
b) AB 1147 (Mullin) of 2007 allowed certain
corporations to sell their unused NOLs. AB 1147 was held
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under in the Assembly Revenue and Taxation Committee.
Analysis Prepared by : Roger Dunstan / APPR. / (916) 319-2081