Amended in Assembly May 20, 2015

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, Baker, Chávez, Dodd, Gonzalez, Lackey, Maienschein, Rodriguez, 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.

Thisbegin delete bill would,end deletebegin insert bill,end insert for taxable years beginning on or after January 1, 2016,begin insert wouldend insert not apply the provisions of the Internal Revenue Code relating to the election of alternative incremental credit. Thisbegin delete bill would,end deletebegin insert bill,end insert for taxable years beginning on or after January 1, 2016, and before January 1,begin delete 2023,end deletebegin insert 2021, wouldend insert 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 “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.”

P3    1(c) Section 41(a)(2) of the Internal Revenue Code shall not
2apply.

3(d) “Qualified research” shall include only research conducted
4in California.

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

9(f) (1) With respect to any expense paid or incurred after the
10operative date of Section 6378, Section 41(b)(1) of the Internal
11Revenue Code, relating to qualified research expenses, is modified
12to exclude from the definition of “qualified research expense” any
13amount paid or incurred for tangible personal property that is
14eligible for the exemption from sales and use taxes, as provided
15by Section 6378.

16(2) For each taxable year beginning on or after January 1, 1998,
17the reference to “Section 501(a)” in Section 41(b)(3)(C) of the
18 Internal Revenue Code, relating to contract research expenses, is
19modified to read “this part or Part 11 (commencing with Section
2023001).”

21(g) (1) (A)  For each taxable year beginning on or after January
221, 2000, and before January 1, 2016:

23(i) The reference to “3 percent” in Section 41(c)(4)(A)(i) of the
24Internal Revenue Code is modified to read “one and forty-nine
25hundredths of one percent.”

26(ii) The reference to “4 percent” in Section 41(c)(4)(A)(ii) of
27the Internal Revenue Code is modified to read “one and
28ninety-eight hundredths of one percent.”

29(iii) The reference to “5 percent” in Section 41(c)(4)(A)(iii) of
30the Internal Revenue Code is modified to read “two and forty-eight
31hundredths of one percent.”

32(B) Section 41(c)(4)(B) of the Internal Revenue Code, relating
33to election, shall not apply and in lieu thereof an election under
34Section 41(c)(4)(A) of the Internal Revenue Code may be made
35for any taxable year of the taxpayer beginning on or after January
361, 1998, and before January 1, 2016. That election shall apply to
37the taxable year for which made and all succeeding taxable years
38beginning before January 1, 2016, unless revoked with the consent
39of the Franchise Tax Board.

P4    1(C) Section 41(h)(2) of the Internal Revenue Code, relating to
2termination of alternative incremental credit, is modified by
3substituting “beginning on or after January 1, 2016” for “beginning
4after December 31, 2008.”

5(2) (A) For taxable years beginning on or after January 1, 2016,
6and before January 1,begin delete 2023,end deletebegin insert 2021,end insert Section 41(c)(5) of the Internal
7Revenue Code, relating to election of alternative simplified credit,
8shall apply, except as otherwise provided.

9(i)  begin delete(I) For taxable years beginning on or after January 1, 2016,
10and before January 1, 2019, the end delete
begin insert The end insertreference to “14 percent” in
11Section 41(c)(5)(A) of the Internal Revenue Code is modified to
12readbegin delete “5end deletebegin insert “7end insert percent.”

begin delete

13(II) For taxable years beginning on or after January 1, 2019,
14and before January 1, 2022, the reference to “14 percent” in Section
1541(c)(5)(A) of the Internal Revenue Code is modified to read “7.75
16percent.”

17(III) For taxable years beginning on or after January 1, 2022,
18and before January 1, 2023, the reference to “14 percent” in Section
1941(c)(5)(A) of the Internal Revenue Code is modified to read “10.5
20percent.”

end delete

21(ii) The reference to “6 percent” in Section 41(c)(5)(B)(ii) of
22the Internal Revenue Code is modified to read “4.5 percent.”

23(B) Section 41(c)(5)(C) of the Internal Revenue Code, relating
24to election, shall not apply and in lieu thereof an election under
25Sections 41(c)(5)(A) and 41(c)(5)(B) of the Internal Revenue Code
26may be made for any taxable year of the taxpayer beginning on or
27after January 1, 2016, and before January 1,begin delete 2023.end deletebegin insert 2021.end insert That
28election shall apply to the taxable year for which made and all
29succeeding taxable years beginning before January 1,begin delete 2023,end deletebegin insert 2021.end insert
30 unless revoked with the consent of the Franchise Tax Board.

31(C) (i) For taxable years beginning on or after January 1,begin delete 2023,end delete
32begin insert 2021,end insert Section 41(c)(5) of the Internal Revenue Code, relating to
33election of alternative simplified credit, shall not apply.

34(ii) No election under Section 41(c)(5) of the Internal Revenue
35Code, relating to election of alternative simplified credit, shall
36apply to taxable years beginning after December 31,begin delete 2022.end deletebegin insert 2020.end insert

37(3) Section 41(c)(7) of the Internal Revenue Code, relating to
38gross receipts, is modified to take into account only those gross
39receipts from the sale of property held primarily for sale to
40customers in the ordinary course of the taxpayer’s trade or business
P5    1that is delivered or shipped to a purchaser within this state,
2regardless of f.o.b. point or any other condition of the sale.

3(h)  Except as otherwise provided in this section, Section 41(h)
4of the Internal Revenue Code, relating to termination, shall not
5apply.

6(i) Section 41(g) of the Internal Revenue Code, relating to
7special rule for pass-thru of credit, is modified by each of the
8following:

9(1) The last sentence shall not apply.

10(2) If the amount determined under Section 41(a) of the Internal
11Revenue Code, relating to general rule, for any taxable year
12exceeds the limitation of Section 41(g) of the Internal Revenue
13Code, relating to special rule for pass-thru of credit, that amount
14may be carried over to other taxable years under the rules of
15subdivision (e); except that the limitation of Section 41(g) of the
16Internal Revenue Code, relating to special rule for pass-thru of
17credit, shall be taken into account in each subsequent taxable year.

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

19(k) Section 41(b)(3)(D) of the Internal Revenue Code, relating
20to amounts paid to eligible small businesses, universities, and
21federal laboratories, shall not apply.

22(l) Section 41(f)(6) of the Internal Revenue Code, relating to
23energy research consortium, shall not apply.

24(m) For taxable years beginning on or after January 1, 2016,
25the amendments made by subdivisions (b) and (c) of Section 301
26of the American Taxpayer Relief Act of 2012 (Public Law
27112-240), relating to inclusion of qualified research expenses and
28gross receipts of an acquired person and aggregation of
29expenditures, shall apply, except as otherwise provided.

30

SEC. 2.  

Section 23609 of the Revenue and Taxation Code is
31amended to read:

32

23609.  

For each taxable year beginning on or after January 1,
331987, there shall be allowed as a credit against the “tax,” as defined
34by Section 23036, an amount determined in accordance with
35Section 41 of the Internal Revenue Code, relating to credit for
36increasing research activities, except as follows:

37(a) For each taxable year beginning before January 1, 1997,
38both of the following modifications shall apply:

39(1) The reference to “20 percent” in Section 41(a)(1) of the
40Internal 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 Revenue Code, relating
26to election, shall not apply and in lieu thereof an election under
27Section 41(c)(4)(A) of the Internal Revenue Code may be made
28for any taxable year of the taxpayer beginning on or after January
291, 1998, and before January 1, 2016. That election shall apply to
30the taxable year for which made and all succeeding taxable years
31beginning before January 1, 2016, unless revoked with the consent
32of 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,begin delete 2023,end deletebegin insert 2021,end insert 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 delete(I)end deletebegin deleteend deletebegin deleteFor taxable years beginning on or after January 1, 2016,
2and before January 1, 2019, the end delete
begin insert The end insertreference to “14 percent” in
3Section 41(c)(5)(A) of the Internal Revenue Code is modified to
4readbegin delete “5end deletebegin insert “7end insert percent.”

begin delete

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

9(III) For taxable years beginning on or after January 1, 2022,
10and before January 1, 2023, the reference to “14 percent” in Section
1141(c)(5)(A) of the Internal Revenue Code is modified to read “10.5
12percent.”

end delete

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,begin delete 2023.end deletebegin insert 2021.end insert That
20election shall apply to the taxable year for which made and all
21succeeding taxable years beginning before January 1,begin delete 2023,end deletebegin insert 2021,end insert
22 unless revoked with the consent of the Franchise Tax Board.

23(C) (i) For taxable years beginning on or after January 1,begin delete 2023,end delete
24begin insert 2021,end insert Section 41(c)(5) of the Internal Revenue Code, relating to
25election of alternative simplified credit, shall not apply.

26(ii) No election under Section 41(c)(5) of the Internal Revenue
27Code, relating to election of alternative simplified credit, shall
28apply to taxable years beginning after December 31,begin delete 2022.end deletebegin insert 2020.end insert

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 for pass-thru of credit, is modified by each of the
40following:

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

2(2) If the amount determined under Section 41(a) of the Internal
3Revenue Code, relating to general rule, for any taxable year
4exceeds the limitation of Section 41(g) of the Internal Revenue
5Code, relating to special rule for pass-thru of credit, 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 Revenue Code, relating to special rule for pass-thru of
9credit, shall be taken into account in each subsequent taxable year.

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

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

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

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

23

SEC. 3.  

This act provides for a tax levy within the meaning
24of Article IV of the Constitution and shall go into immediate effect.



O

    97