Amended in Assembly May 11, 2015

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,begin insert Baker,end insert Chávez, Dodd,begin insert Gonzalez,end insert Lackey, Maienschein,begin insert Rodriguez,end insert 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 amended, 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 Revenuebegin delete Code,end deletebegin insert Codeend insert 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 Revenuebegin delete Code,end deletebegin insert Codeend insert 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 “net tax,”
5defined by Section 17039, for the taxable year an amount
6determined in accordance with Section 41 of the Internal Revenue
7Code, relating to credit for increasing research activities, except
8as 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.

P3    1(d) “Qualified research” shall include only research conducted
2in California.

3(e) In the case where the credit allowed under this section
4exceeds the “net tax,” the excess may be carried over to reduce
5the “net tax” in the following year, and succeeding years if
6necessary, until the credit has been exhausted.

7(f) (1) With respect to any expense paid or incurred after the
8operative date of Section 6378, Section 41(b)(1) of the Internal
9Revenue Code, relating to qualified research expenses, is modified
10to exclude from the definition of “qualified research expense” any
11amount paid or incurred for tangible personal property that is
12eligible for the exemption from sales and use taxes, as provided
13by Section 6378.

14(2) For each taxable year beginning on or after January 1, 1998,
15the reference to “Section 501(a)” in Section 41(b)(3)(C) of the
16Internal Revenue Code, relating to contract research expenses, is
17modified to read “this part or Part 11 (commencing with Section
1823001).”

19(g) (1) (A)  For each taxable year beginning on or after January
201, 2000, and before January 1, 2016:

21(i) The reference to “3 percent” in Section 41(c)(4)(A)(i) of the
22Internal Revenue Code is modified to read “one and forty-nine
23hundredths of one percent.”

24(ii) 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.”

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

30(B) Section 41(c)(4)(B) of the Internal Revenuebegin delete Codeend deletebegin insert Code,
31relating to election,end insert
shall not apply and in lieu thereof an election
32under Section 41(c)(4)(A) of the Internal Revenue Code may be
33made for any taxable year of the taxpayer beginning on or after
34January 1, 1998, and before January 1, 2016. That election shall
35apply to the taxable year for which made and all succeeding taxable
36yearsbegin insert beginning before January 1, 2016,end insert unless revoked with the
37consent of the Franchise Tax Board.

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

3(2) (A) For taxable years beginning on or after January 1, 2016,
4and 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.

7(i) begin deleteThe end deletebegin insert(I)end insertbegin insertend insertbegin insertFor taxable years beginning on or after January 1,
82016, and before January 1, 2019, the end insert
reference to “14 percent”
9in Section 41(c)(5)(A) of the Internal Revenue Code is modified
10to readbegin delete “10.5end deletebegin insert “5end insert percent.”

begin insert

11(II) For taxable years beginning on or after January 1, 2019,
12and before January 1, 2022, the reference to “14 percent” in
13Section 41(c)(5)(A) of the Internal Revenue Code is modified to
14read “7.75 percent.”

end insert
begin insert

15(III) For taxable years beginning on or after January 1, 2022,
16and before January 1, 2023, the reference to “14 percent” in
17Section 41(c)(5)(A) of the Internal Revenue Code is modified to
18read “10.5 percent.”

end insert

19(ii) The reference to “6 percent” in Section 41(c)(5)(B)(ii) of
20the Internal Revenue Code is modified to read “4.5 percent.”

21(B) Section 41(c)(5)(C) of the Internal Revenue Code, relating
22to election, shall not apply and in lieu thereof an election under
23Sections 41(c)(5)(A) and 41(c)(5)(B) of the Internal Revenue Code
24may be made for any taxable year of the taxpayer beginning on or
25after January 1, 2016, and before January 1, 2023. That election
26shall apply to the taxable year for which made and all succeeding
27taxable yearsbegin insert beginning before January 1, 2023,end insert unless revoked
28with the consent of the Franchise Tax Board.

29(C) (i) For taxable years beginning on or after January 1, 2023,
30Section 41(c)(5) of the Internal Revenuebegin delete Codeend deletebegin insert Code, relating to
31election of alternative simplified credit,end insert
shall not apply.

32(ii) No election under Section 41(c)(5)begin insert of the Internal Revenue
33Code, end insert
begin insertrelating to election of alternative simplified credit,end insert shall
34apply to taxable years beginning after December 31, 2022.

35(3) Section 41(c)(7) of the Internal Revenue Code, relating to
36gross receipts, is modified to take into account only those gross
37receipts from the sale of property held primarily for sale to
38customers in the ordinary course of the taxpayer’s trade or business
39that is delivered or shipped to a purchaser within this state,
40regardless of f.o.b. point or any other condition of the sale.

P5    1(h)  Except as otherwise provided in this section, Section 41(h)
2of the Internal Revenue Code, relating to termination, shall not
3apply.

4(i) Section 41(g) of the Internal Revenue Code, relating to
5special rule forbegin delete passthroughend deletebegin insert pass-thruend insert of credit, is modified by
6each of the following:

7(1) The last sentence shall not apply.

8(2) If the amount determined under Section 41(a) of the Internal
9Revenuebegin delete Codeend deletebegin insert Code, relating to general rule,end insert for any taxable year
10exceeds the limitation of Section 41(g) of the Internal Revenue
11Code,begin insert relating to special rule for pass-thru of credit,end insert that amount
12may be carried over to other taxable years under the rules of
13subdivision (e); except that the limitation of Section 41(g) of the
14Internal Revenuebegin delete Codeend deletebegin insert Code, relating to special rule for pass-thru
15of credit,end insert
shall be taken into account in each subsequent taxable
16year.

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

18(k) Section 41(b)(3)(D) of the Internal Revenue Code, relating
19to amounts paid to eligible small businesses, universities, and
20federal laboratories, shall not apply.

21(l) Section 41(f)(6) of the Internal Revenue Code, relating to
22energy research consortium, shall not apply.

23(m) For taxable years beginning on or after January 1, 2016,
24the amendments made by subdivisions (b) and (c) of Section 301
25of the American Taxpayer Relief Act of 2012 (Public Law
26112-240), relating to inclusion of qualified research expenses and
27gross receipts of an acquired person and aggregation of
28expenditures, shall apply, except as otherwise provided.

29

SEC. 2.  

Section 23609 of the Revenue and Taxation Code is
30amended to read:

31

23609.  

For each taxable year beginning on or after January 1,
321987, there shall be allowed as a credit against the “tax,” as defined
33by Section 23036, an amount determined in accordance with
34Section 41 of the Internal Revenue Code, relating to credit for
35increasing research activities, except as follows:

36(a) For each taxable year beginning before January 1, 1997,
37both of the following modifications shall apply:

38(1) The reference to “20 percent” in Section 41(a)(1) of the
39Internal Revenue Code is modified to read “8 percent.”

P6    1(2) The reference to “20 percent” in Section 41(a)(2) of the
2Internal Revenue Code is modified to read “12 percent.”

3(b) (1) For each taxable year beginning on or after January 1,
41997, and before January 1, 1999, both of the following
5modifications shall apply:

6(A) The reference to “20 percent” in Section 41(a)(1) of the
7Internal Revenue Code is modified to read “11 percent.”

8(B) The reference to “20 percent” in Section 41(a)(2) of the
9Internal Revenue Code is modified to read “24 percent.”

10(2) For each taxable year beginning on or after January 1, 1999,
11and before January 1, 2000, both of the following shall apply:

12(A) The reference to “20 percent” in Section 41(a)(1) of the
13Internal Revenue Code is modified to read “12 percent.”

14(B) The reference to “20 percent” in Section 41(a)(2) of the
15Internal Revenue Code is modified to read “24 percent.”

16(3) For each taxable year beginning on or after January 1, 2000,
17both of the following shall apply:

18(A) The reference to “20 percent” in Section 41(a)(1) of the
19Internal Revenue Code is modified to read “15 percent.”

20(B) The reference to “20 percent” in Section 41(a)(2) of the
21Internal Revenue Code is modified to read “24 percent.”

22(c) (1) With respect to any expense paid or incurred after the
23operative date of Section 6378, Section 41(b)(1) of the Internal
24Revenue Code, relating to qualified research expenses, is modified
25to exclude from the definition of “qualified research expense” any
26amount paid or incurred for tangible personal property that is
27eligible for the exemption from sales and use taxes, as provided
28by Section 6378.

29(2) “Qualified research” and “basic research” shall include only
30research conducted in California.

31(d) The provisions of Section 41(e)(7)(A) of the Internal
32Revenue Code, relating to basic research, shall be modified so that
33“basic research,” for purposes of this section, includes any basic
34or applied research including scientific inquiry or original
35investigation for the advancement of scientific or engineering
36knowledge or the improved effectiveness of commercial products,
37except that the term does not include any of the following:

38(1) Basic research conducted outside California.

39(2) Basic research in the social sciences, arts, or humanities.

P7    1(3) Basic research for the purpose of improving a commercial
2product if the improvements relate to style, taste, cosmetic, or
3seasonal design factors.

4(4) Any expenditure paid or incurred for the purpose of
5ascertaining the existence, location, extent, or quality of any deposit
6of ore or other mineral (including oil and gas).

7(e) (1) In the case of a taxpayer engaged in any
8biopharmaceutical research activities that are described in codes
92833 to 2836, inclusive, or any research activities that are described
10in codes 3826, 3829, or 3841 to 3845, inclusive, of the Standard
11Industrial Classification (SIC) Manual published by the United
12States Office of Management and Budget, 1987 edition, or any
13other biotechnology research and development activities, the
14provisions of Section 41(e)(6) of the Internal Revenue Code,
15relating to qualified organizations, shall be modified to include
16both of the following:

17(A) A qualified organization as described in Section
18170(b)(1)(A)(iii) of the Internal Revenue Code and owned by an
19institution of higher education as described in Section 3304(f) of
20the Internal Revenue Code, relating to definition of institution of
21higher education.

22(B) A charitable research hospital owned by an organization
23that is described in Section 501(c)(3) of the Internal Revenue Code,
24is exempt from taxation under Section 501(a) of the Internal
25Revenue Code, relating to exemption from taxation, is not a private
26foundation, is designated a “specialized laboratory cancer center,”
27and has received Clinical Cancer Research Center status from the
28National Cancer Institute.

29(2) For purposes of this subdivision:

30(A) “Biopharmaceutical research activities” means those
31activities that use organisms or materials derived from organisms,
32and their cellular, subcellular, or molecular components, in order
33to provide pharmaceutical products for human or animal
34therapeutics and diagnostics. Biopharmaceutical activities make
35use of living organisms to make commercial products, as opposed
36to pharmaceutical activities that make use of chemical compounds
37to produce commercial products.

38(B) “Other biotechnology research and development activities”
39means research and development activities consisting of the
40application of recombinant DNA technology to produce
P8    1commercial products, as well as research and development
2activities regarding pharmaceutical delivery systems designed to
3provide a measure of control over the rate, duration, and site of
4pharmaceutical delivery.

5(f) In the case where the credit allowed by this section exceeds
6the “tax,” the excess may be carried over to reduce the “tax” in
7the following year, and succeeding years if necessary, until the
8credit has been exhausted.

9(g) For each taxable year beginning on or after January 1, 1998,
10the reference to “Section 501(a)” in Section 41(b)(3)(C) of the
11Internal Revenue Code, relating to contract research expenses, is
12modified to read “this part or Part 10 (commencing with Section
1317001).”

14(h) (1) (A)  For each taxable year beginning on or after January
151, 2000, and before January 1, 2016:

16(i) The reference to “3 percent” in Section 41(c)(4)(A)(i) of the
17Internal Revenue Code is modified to read “one and forty-nine
18hundredths of one percent.”

19(ii) The reference to “4 percent” in Section 41(c)(4)(A)(ii) of
20the Internal Revenue Code is modified to read “one and
21ninety-eight hundredths of one percent.”

22(iii) The reference to “5 percent” in Section 41(c)(4)(A)(iii) of
23the Internal Revenue Code is modified to read “two and forty-eight
24hundredths of one percent.”

25(B) Section 41(c)(4)(B) of the Internal Revenuebegin delete Codeend deletebegin insert Code,
26relating to election,end insert
shall not apply and in lieu thereof an election
27under Section 41(c)(4)(A) of the Internal Revenue Code may be
28made for any taxable year of the taxpayer beginning on or after
29January 1, 1998, and before January 1, 2016. That election shall
30apply to the taxable year for which made and all succeeding taxable
31yearsbegin insert beginning before January 1, 2016,end insert unless revoked with the
32consent of the Franchise Tax Board.

33(C) Section 41(h)(2) of the Internal Revenue Code, relating to
34termination of alternative incremental credit, is modified by
35substituting “beginning on or after January 1, 2016” for “beginning
36after December 31, 2008.”

37(2) (A) For taxable years beginning on or after January 1, 2016,
38and before January 1, 2023, Section 41(c)(5) of the Internal
39Revenue Code, relating to election of alternative simplified credit,
40shall apply, except as otherwise provided.

P9    1(i) begin deleteThe end deletebegin insert(I)end insertbegin insertend insertbegin insertFor taxable years beginning on or after January 1,
22016, and before January 1, 2019, the end insert
reference to “14 percent”
3in Section 41(c)(5)(A) of the Internal Revenue Code is modified
4to readbegin delete “10.5end deletebegin insert “5end insert percent.”

begin insert

5(II) For taxable years beginning on or after January 1, 2019,
6and before January 1, 2022, the reference to “14 percent” in
7Section 41(c)(5)(A) of the Internal Revenue Code is modified to
8read “7.75 percent.”

end insert
begin insert

9(III) For taxable years beginning on or after January 1, 2022,
10and before January 1, 2023, the reference to “14 percent” in
11Section 41(c)(5)(A) of the Internal Revenue Code is modified to
12read “10.5 percent.”

end insert

13(ii) The reference to “6 percent” in Section 41(c)(5)(B)(ii) of
14the Internal Revenue Code is modified to read “4.5 percent.”

15(B) Section 41(c)(5)(C) of the Internal Revenue Code, relating
16to election, shall not apply and in lieu thereof an election under
17Sections 41(c)(5)(A) and 41(c)(5)(B) of the Internal Revenue Code
18may be made for any taxable year of the taxpayer beginning on or
19after January 1, 2016, and before January 1, 2023. That election
20shall apply to the taxable year for which made and all succeeding
21taxable yearsbegin insert beginning before January 1, 2023,end insert unless revoked
22with the consent of the Franchise Tax Board.

23(C) (i) For taxable years beginning on or after January 1, 2023,
24Section 41(c)(5) of the Internal Revenuebegin delete Codeend deletebegin insert Code, relating to
25election of alternative simplified credit,end insert
shall not apply.

26(ii) No election under Section 41(c)(5)begin insert of the Internal Revenue
27Code, relating to election of alternative simplified credit,end insert
shall
28apply to taxable years beginning after December 31, 2022.

29(3) Section 41(c)(7) of the Internal Revenue Code, relating to
30gross receipts, is modified to take into account only those gross
31receipts from the sale of property held primarily for sale to
32customers in the ordinary course of the taxpayer’s trade or business
33that is delivered or shipped to a purchaser within this state,
34regardless of f.o.b. point or any other condition of the sale.

35(i)  Except as otherwise provided in this section, Section 41(h)
36of the Internal Revenue Code, relating to termination, shall not
37apply.

38(j) Section 41(g) of the Internal Revenue Code, relating to
39special rule forbegin delete passthroughend deletebegin insert pass-thruend insert of credit, is modified by
40each of the following:

P10   1(1) The last sentence shall not apply.

2(2) If the amount determined under Section 41(a) of the Internal
3Revenuebegin delete Codeend deletebegin insert Code, relating to general rule,end insert for any taxable year
4exceeds the limitation of Section 41(g) of the Internal Revenue
5Code,begin insert relating to special rule for pass-thru of credit,end insert that amount
6may be carried over to other taxable years under the rules of
7subdivision (f), except that the limitation of Section 41(g) of the
8 Internal Revenuebegin delete Codeend deletebegin insert Code, relating to special rule for pass-thru
9of credit,end insert
shall be taken into account in each subsequent taxable
10year.

11(k) Section 41(a)(3) of the Internal Revenue Code shall not
12apply.

13(l) Section 41(b)(3)(D) of the Internal Revenue Code, relating
14to amounts paid to eligible small businesses, universities, and
15federal laboratories, shall not apply.

16(m) Section 41(f)(6) of the Internal Revenue Code, relating to
17energy research consortium, shall not apply.

18(n) For taxable years beginning on or after January 1, 2016, the
19amendments made by subdivisions (b) and (c) of Section 301 of
20the American Taxpayer Relief Act of 2012 (Public Law 112-240),
21relating to inclusion of qualified research expenses and gross
22receipts of an acquired person and aggregation of expenditures,
23shall apply, except as otherwise provided.

24

SEC. 3.  

This act provides for a tax levy within the meaning
25of Article IV of the Constitution and shall go into immediate effect.



O

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