California Legislature—2015–16 Regular Session

Assembly BillNo. 544


Introduced by Assembly Member Mullin

(Principal coauthor: Assembly Member Low)

(Principal coauthor: Senator Wieckowski)

(Coauthors: Assembly Members Travis Allen, Chávez, Dodd, Lackey, Maienschein, Steinorth, Waldron, and Wilk)

(Coauthor: Senator Anderson)

February 23, 2015


An act to amend Sections 17052.12 and 23609 of the Revenue and Taxation Code, relating to taxation, to take effect immediately, tax levy.

LEGISLATIVE COUNSEL’S DIGEST

AB 544, as introduced, Mullin. Income taxes: credits: research activities.

The Personal Income Tax Law and the Corporation Tax Law allow various credits against the taxes imposed by those laws, including a credit for a percentage of specified research expenses. These laws, in modified conformity, apply the provisions of the Internal Revenue Code, relating to the election of alternative incremental credit. These laws provide that the provisions of the Internal Revenue Code relating to election of alternative simplified credit shall not apply.

This bill would, for taxable years beginning on or after January 1, 2016, not apply the provisions of the Internal Revenue Code, relating to the election of alternative incremental credit. This bill would, for taxable years beginning on or after January 1, 2016, and before January 1, 2023, apply the provisions of the Internal Revenue Code, relating to election of alternative simplified credit in modified conformity, and for taxable years beginning on or after January 1, 2016, would apply the provisions of the Internal Revenue Code, relating to the inclusion of qualified research expenses and gross receipts of an acquired person and aggregation of expenditures.

This bill would include a change in state statute that would result in a taxpayer paying a higher tax within the meaning of Section 3 of Article XIII A of the California Constitution, and thus would require for passage the approval of 23 of the membership of each house of the Legislature.

This bill would take effect immediately as a tax levy.

Vote: 23. Appropriation: no. Fiscal committee: yes. State-mandated local program: no.

The people of the State of California do enact as follows:

P2    1

SECTION 1.  

Section 17052.12 of the Revenue and Taxation
2Code
is amended to read:

3

17052.12.  

For each taxable year beginning on or after January
41, 1987, there shall be allowed as a credit against the “netbegin delete tax” (asend delete
5begin insert tax,”end insert defined by Sectionbegin delete 17039)end deletebegin insert 17039,end insert for the taxable year an
6amount determined in accordance with Section 41 of the Internal
7Revenue Code,begin insert relating to credit for increasing research activities,end insert
8 except as follows:

9(a) For each taxable year beginning before January 1, 1997, the
10reference to “20 percent” in Section 41(a)(1) of the Internal
11Revenue Code is modified to read “8 percent.”

12(b) (1) For each taxable year beginning on or after January 1,
131997, and before January 1, 1999, the reference to “20 percent”
14in Section 41(a)(1) of the Internal Revenue Code is modified to
15read “11 percent.”

16(2) For each taxable year beginning on or after January 1, 1999,
17and before January 1, 2000, the reference to “20 percent” in Section
1841(a)(1) of the Internal Revenue Code is modified to read “12
19percent.”

20(3) For each taxable year beginning on or after January 1, 2000,
21the reference to “20 percent” in Section 41(a)(1) of the Internal
22Revenue Code is modified to read “15 percent.”

23(c) Section 41(a)(2) of the Internal Revenue Code shall not
24apply.

25(d) “Qualified research” shall include only research conducted
26in California.

P3    1(e) In the case where the credit allowed under this section
2exceeds the “net tax,” the excess may be carried over to reduce
3the “net tax” in the following year, and succeeding years if
4necessary, until the credit has been exhausted.

5(f) (1) With respect to any expense paid or incurred after the
6operative date of Section 6378, Section 41(b)(1) of the Internal
7Revenuebegin delete Codeend deletebegin insert Code, relating to qualified research expenses,end insert is
8modified to exclude from the definition of “qualified research
9expense” any amount paid or incurred for tangible personal
10property that is eligible for the exemption from salesbegin delete orend deletebegin insert andend insert use
11begin delete taxend deletebegin insert taxes, asend insert provided by Section 6378.

12(2) For each taxable year beginning on or after January 1, 1998,
13the reference to “Section 501(a)” in Section 41(b)(3)(C) of the
14Internal Revenue Code, relating to contract research expenses, is
15modified to read “this part or Part 11 (commencing with Section
1623001).”

17(g) (1) begin insert(A)end insertbegin insertend insert For each taxable year beginning on or after January
181,begin delete 2000:end deletebegin insert 2000, and before January 1, 2016:end insert

begin delete

19(A)

end delete

20begin insert(i)end insert The reference to “3 percent” in Section 41(c)(4)(A)(i) of the
21Internal Revenue Code is modified to read “one and forty-nine
22hundredths of one percent.”

begin delete

23(B)

end delete

24begin insert(ii)end insert The reference to “4 percent” in Section 41(c)(4)(A)(ii) of
25the Internal Revenue Code is modified to read “one and
26ninety-eight hundredths of one percent.”

begin delete

27(C)

end delete

28begin insert(iii)end insert The reference to “5 percent” in Section 41(c)(4)(A)(iii) of
29the Internal Revenue Code is modified to read “two and forty-eight
30hundredths of one percent.”

begin delete

31(2)

end delete

32begin insert(B)end insert Section 41(c)(4)(B)begin insert of the Internal Revenue Codeend insert shall not
33apply and in lieu thereof an election under Section 41(c)(4)(A) of
34the Internal Revenue Code may be made for any taxable year of
35the taxpayer beginning on or after January 1,begin delete 1998.end deletebegin insert 1998, and
36before January 1, 2016.end insert
That election shall apply to the taxable
37year for which made and all succeeding taxable years unless
38revoked with the consent of the Franchise Tax Board.

begin insert

39(C) Section 41(h)(2) of the Internal Revenue Code, relating to
40termination of alternative incremental credit, is modified by
P4    1substituting “beginning on or after January 1, 2016” for
2“beginning after December 31, 2008.”

end insert
begin insert

3(2) (A) For taxable years beginning on or after January 1,
42016, and before January 1, 2023, Section 41(c)(5) of the Internal
5Revenue Code, relating to election of alternative simplified credit,
6shall apply, except as otherwise provided.

end insert
begin insert

7(i) The reference to “14 percent” in Section 41(c)(5)(A) of the
8Internal Revenue Code is modified to read “10.5 percent.”

end insert
begin insert

9(ii) The reference to “6 percent” in Section 41(c)(5)(B)(ii) of
10the Internal Revenue Code is modified to read “4.5 percent.”

end insert
begin insert

11(B) Section 41(c)(5)(C) of the Internal Revenue Code, relating
12to election, shall not apply and in lieu thereof an election under
13Sections 41(c)(5)(A) and 41(c)(5)(B) of the Internal Revenue Code
14may be made for any taxable year of the taxpayer beginning on
15or after January 1, 2016, and before January 1, 2023. That election
16shall apply to the taxable year for which made and all succeeding
17taxable years unless revoked with the consent of the Franchise
18Tax Board.

end insert
begin insert

19(C) (i) For taxable years beginning on or after January 1, 2023,
20Section 41(c)(5) of the Internal Revenue Code shall not apply.

end insert
begin insert

21(ii) No election under Section 41(c)(5) shall apply to taxable
22years beginning after December 31, 2022.

end insert

23(3) Section 41(c)(7) of the Internal Revenue Code, relating to
24gross receipts, is modified to take into account only those gross
25receipts from the sale of property held primarily for sale to
26customers in the ordinary course of the taxpayer’s trade or business
27that is delivered or shipped to a purchaser within this state,
28regardless of f.o.b. point or any other condition of the sale.

begin delete end deletebegin delete

29(4) Section 41(c)(5) of the Internal Revenue Code, relating to
30election of alternative simplified credit, shall not apply.

end delete
begin delete end delete

31(h) begin insert Except as otherwise provided in this section,end insert Section 41(h)
32of the Internal Revenue Code, relating to termination, shall not
33apply.

34(i) Section 41(g) of the Internal Revenue Code, relating to
35special rule for passthrough of credit, is modified by each of the
36following:

37(1) The last sentence shall not apply.

38(2) If the amount determined under Section 41(a) of the Internal
39Revenue Code for any taxable year exceeds the limitation of
40Section 41(g) of the Internal Revenue Code, that amount may be
P5    1carried over to other taxable years under the rules of subdivision
2(e); except that the limitation of Section 41(g) of the Internal
3Revenue Code shall be taken into account in each subsequent
4taxable year.

5(j) Section 41(a)(3) of the Internal Revenue Code shall not apply.

6(k) Section 41(b)(3)(D) of the Internal Revenue Code, relating
7to amounts paid to eligible small businesses, universities, and
8federal laboratories, shall not apply.

9(l) Sectionbegin delete 41(f)(6),end deletebegin insert 41(f)(6) of the Internal Revenue Code,end insert
10 relating to energy research consortium, shall not apply.

begin insert

11(m) For taxable years beginning on or after January 1, 2016,
12the amendments made by subdivisions (b) and (c) of Section 301
13of the American Taxpayer Relief Act of 2012 (Public Law 112-240),
14relating to inclusion of qualified research expenses and gross
15receipts of an acquired person and aggregation of expenditures,
16shall apply, except as otherwise provided.

end insert
17

SEC. 2.  

Section 23609 of the Revenue and Taxation Code is
18amended to read:

19

23609.  

For each taxable year beginning on or after January 1,
201987, there shall be allowed as a credit against thebegin delete “tax” (asend deletebegin insert “tax,”
21asend insert
defined by Sectionbegin delete 23036)end deletebegin insert 23036,end insert an amount determined in
22accordance with Section 41 of the Internal Revenue Code,begin insert relating
23to credit for increasing research activities,end insert
except as follows:

24(a) For each taxable year beginning before January 1, 1997,
25both of the following modifications shall apply:

26(1) The reference to “20 percent” in Section 41(a)(1) of the
27Internal Revenue Code is modified to read “8 percent.”

28(2) The reference to “20 percent” in Section 41(a)(2) of the
29Internal Revenue Code is modified to read “12 percent.”

30(b) (1) For each taxable year beginning on or after January 1,
311997, and before January 1, 1999, both of the following
32modifications shall apply:

33(A) The reference to “20 percent” in Section 41(a)(1) of the
34Internal Revenue Code is modified to read “11 percent.”

35(B) The reference to “20 percent” in Section 41(a)(2) of the
36Internal Revenue Code is modified to read “24 percent.”

37(2) For each taxable year beginning on or after January 1, 1999,
38and before January 1, 2000, both of the following shall apply:

39(A) The reference to “20 percent” in Section 41(a)(1) of the
40Internal Revenue Code is modified to read “12 percent.”

P6    1(B) The reference to “20 percent” in Section 41(a)(2) of the
2Internal Revenue Code is modified to read “24 percent.”

3(3) For each taxable year beginning on or after January 1, 2000,
4both of the following shall apply:

5(A) The reference to “20 percent” in Section 41(a)(1) of the
6Internal Revenue Code is modified to read “15 percent.”

7(B) The reference to “20 percent” in Section 41(a)(2) of the
8Internal Revenue Code is modified to read “24 percent.”

9(c) (1) With respect to any expense paid or incurred after the
10operative date of Section 6378, Section 41(b)(1) of the Internal
11Revenuebegin delete Codeend deletebegin insert Code, relating to qualified research expenses,end insert is
12modified to exclude from the definition of “qualified research
13expense” any amount paid or incurred for tangible personal
14property that is eligible for the exemption from salesbegin delete orend deletebegin insert andend insert use
15begin delete taxend deletebegin insert taxes, asend insert provided by Section 6378.

16(2) “Qualified research” and “basic research” shall include only
17research conducted in California.

18(d) The provisions of Section 41(e)(7)(A) of the Internal
19Revenue Code,begin insert relating to basic research,end insert shall be modified so
20that “basic research,” for purposes of this section, includes any
21basic or applied research including scientific inquiry or original
22investigation for the advancement of scientific or engineering
23knowledge or the improved effectiveness of commercial products,
24except that the term does not include any of the following:

25(1) Basic research conducted outside California.

26(2) Basic research in the social sciences, arts, or humanities.

27(3) Basic research for the purpose of improving a commercial
28product if the improvements relate to style, taste, cosmetic, or
29seasonal design factors.

30(4) Any expenditure paid or incurred for the purpose of
31ascertaining the existence, location, extent, or quality of any deposit
32of ore or other mineral (including oil and gas).

33(e) (1) In the case of a taxpayer engaged in any
34biopharmaceutical research activities that are described in codes
352833 to 2836, inclusive, or any research activities that are described
36in codes 3826, 3829, or 3841 to 3845, inclusive, of the Standard
37Industrial Classification (SIC) Manual published by the United
38States Office of Management and Budget, 1987 edition, or any
39other biotechnology research and development activities, the
40provisions of Section 41(e)(6) of the Internal Revenuebegin delete Codeend deletebegin insert Code,
P7    1relating to qualified organizations,end insert
shall be modified to include
2both of the following:

3(A) A qualified organization as described in Section
4170(b)(1)(A)(iii) of the Internal Revenue Code and owned by an
5institution of higher education as described in Section 3304(f) of
6the Internal Revenuebegin delete Code.end deletebegin insert Code, relating to definition of
7institution of higher education.end insert

8(B) A charitable research hospital owned by an organization
9that is described in Section 501(c)(3) of the Internal Revenue Code,
10is exempt from taxation under Section 501(a) of the Internal
11Revenue Code,begin insert relating to exemption from taxation,end insert is not a private
12foundation, is designated a “specialized laboratory cancer center,”
13and has received Clinical Cancer Research Center status from the
14National Cancer Institute.

15(2) For purposes of this subdivision:

16(A) “Biopharmaceutical research activities” means those
17activities that use organisms or materials derived from organisms,
18and their cellular, subcellular, or molecular components, in order
19to provide pharmaceutical products for human or animal
20therapeutics and diagnostics. Biopharmaceutical activities make
21use of living organisms to make commercial products, as opposed
22to pharmaceutical activities that make use of chemical compounds
23to produce commercial products.

24(B) “Other biotechnology research and development activities”
25means research and development activities consisting of the
26application of recombinant DNA technology to produce
27commercial products, as well as research and development
28activities regarding pharmaceutical delivery systems designed to
29provide a measure of control over the rate, duration, and site of
30pharmaceutical delivery.

31(f) In the case where the credit allowed by this section exceeds
32the “tax,” the excess may be carried over to reduce the “tax” in
33the following year, and succeeding years if necessary, until the
34credit has been exhausted.

35(g) For each taxable year beginning on or after January 1, 1998,
36the reference to “Section 501(a)” in Section 41(b)(3)(C) of the
37Internal Revenue Code, relating to contract research expenses, is
38modified to read “this part or Part 10 (commencing with Section
3917001).”

P8    1(h) (1) begin insert(A)end insertbegin insertend insert For each taxable year beginning on or after January
21,begin delete 2000:end deletebegin insert 2000, and before January 1, 2016:end insert

begin delete

3(A)

end delete

4begin insert(i)end insert The reference to “3 percent” in Section 41(c)(4)(A)(i) of the
5Internal Revenue Code is modified to read “one and forty-nine
6hundredths of one percent.”

begin delete

7(B)

end delete

8begin insert(ii)end insert The reference to “4 percent” in Section 41(c)(4)(A)(ii) of
9the Internal Revenue Code is modified to read “one and
10ninety-eight hundredths of one percent.”

begin delete

11(C)

end delete

12begin insert(iii)end insert The reference to “5 percent” in Section 41(c)(4)(A)(iii) of
13the Internal Revenue Code is modified to read “two and forty-eight
14hundredths of one percent.”

begin delete

15(2)

end delete

16begin insert(B)end insert Section 41(c)(4)(B)begin insert of the Internal Revenue Codeend insert shall not
17apply and in lieu thereof an election under Section 41(c)(4)(A) of
18the Internal Revenue Code may be made for any taxable year of
19the taxpayer beginning on or after January 1,begin delete 1998.end deletebegin insert 1998, and
20before January 1, 2016.end insert
That election shall apply to the taxable
21year for which made and all succeeding taxable years unless
22revoked with the consent of the Franchise Tax Board.

begin insert

23(C) Section 41(h)(2) of the Internal Revenue Code, relating to
24termination of alternative incremental credit, is modified by
25substituting “beginning on or after January 1, 2016” for
26“beginning after December 31, 2008.”

end insert
begin insert

27(2) (A) For taxable years beginning on or after January 1,
282016, and before January 1, 2023, Section 41(c)(5) of the Internal
29Revenue Code, relating to election of alternative simplified credit,
30shall apply, except as otherwise provided.

end insert
begin insert

31(i) The reference to “14 percent” in Section 41(c)(5)(A) of the
32Internal Revenue Code is modified to read “10.5 percent.”

end insert
begin insert

33(ii) The reference to “6 percent” in Section 41(c)(5)(B)(ii) of
34the Internal Revenue Code is modified to read “4.5 percent.”

end insert
begin insert

35(B) Section 41(c)(5)(C) of the Internal Revenue Code, relating
36to election, shall not apply and in lieu thereof an election under
37Sections 41(c)(5)(A) and 41(c)(5)(B) of the Internal Revenue Code
38may be made for any taxable year of the taxpayer beginning on
39or after January 1, 2016, and before January 1, 2023. That election
40shall apply to the taxable year for which made and all succeeding
P9    1taxable years unless revoked with the consent of the Franchise
2Tax Board.

end insert
begin insert

3(C) (i) For taxable years beginning on or after January 1, 2023,
4Section 41(c)(5) of the Internal Revenue Code shall not apply.

end insert
begin insert

5(ii) No election under Section 41(c)(5) shall apply to taxable
6years beginning after December 31, 2022.

end insert

7(3) Section 41(c)(7) of the Internal Revenue Code, relating to
8gross receipts, is modified to take into account only those gross
9receipts from the sale of property held primarily for sale to
10customers in the ordinary course of the taxpayer’s trade or business
11that is delivered or shipped to a purchaser within this state,
12regardless of f.o.b. point or any other condition of the sale.

begin delete end deletebegin delete

13(4) Section 41(c)(5) of the Internal Revenue Code, relating to
14election of the alternative simplified credit, shall not apply.

end delete
begin delete end delete

15(i) begin insert Except as otherwise provided in this section,end insert Section 41(h)
16of the Internal Revenue Code, relating to termination, shall not
17apply.

18(j) Section 41(g) of the Internal Revenue Code, relating to
19special rule for passthrough of credit, is modified by each of the
20following:

21(1) The last sentence shall not apply.

22(2) If the amount determined under Section 41(a) of the Internal
23Revenue Code for any taxable year exceeds the limitation of
24Section 41(g) of the Internal Revenue Code, that amount may be
25carried over to other taxable years under the rules of subdivision
26(f), except that the limitation of Section 41(g) of the Internal
27Revenue Code shall be taken into account in each subsequent
28taxable year.

29(k) Section 41(a)(3) of the Internal Revenue Code shall not
30apply.

31(l) Section 41(b)(3)(D) of the Internal Revenue Code, relating
32to amounts paid to eligible small businesses, universities, and
33federal laboratories, shall not apply.

34(m) Section 41(f)(6) of the Internal Revenue Code, relating to
35energy research consortium, shall not apply.

begin insert

36(n) For taxable years beginning on or after January 1, 2016,
37the amendments made by subdivisions (b) and (c) of Section 301
38of the American Taxpayer Relief Act of 2012 (Public Law 112-240),
39relating to inclusion of qualified research expenses and gross
P10   1receipts of an acquired person and aggregation of expenditures,
2shall apply, except as otherwise provided.

end insert
3

SEC. 3.  

This act provides for a tax levy within the meaning
4of Article IV of the Constitution and shall go into immediate effect.



O

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