BILL ANALYSIS �
AB 1818
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Date of Hearing: August 8, 2012
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
AB 1818 (Perea) - As Amended: May 17, 2012
Policy Committee: Revenue and
Taxation Vote: 8-0
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill allows an income tax credit to a qualified taxpayer in
an amount equal to an unspecified percentage of qualified
royalties paid by the taxpayer. Specifically, this bill:
1)Authorizes a tax credit, under both the personal income tax
and the corporation tax laws, for taxable years beginning on
or after January 1, 2012, in an amount equal to 15% of the
qualified royalties paid by a qualified taxpayer during a
taxable year.
2)Defines "qualified taxpayer" as a taxpayer that paid qualified
royalties during the taxable year and commercializes in
California the licensed patent, for which royalties were paid.
3)Defines "qualified royalties" as any royalties paid by a
qualified taxpayer for the use of a qualified patent through a
license agreement with the University of California (UC) or
another entity
4)Provides that unused credit amounts may be carried over to
reduce the tax in the following years, until the credit is
exhausted.
5)Takes effect immediately as a tax levy.
FISCAL EFFECT
The revenue loss from this bill would be approximately $10-15
million annually, when the full amount of credit are claimed.
Total royalty payments have been approximately $100 million
AB 1818
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annually, so a 15% credit would mean a maximum $15 million
revenue loss. The bill is limited to goods manufactured in
California so not all royalty payments would qualify for the
credit.
COMMENTS
1)Purpose. The author argues AB 1818 provides California a
significant opportunity to promote business innovation for
California. The author notes between 2001 and 2011, California
lost 613,000 manufacturing jobs, many of them outsourced to
cheaper markets in other countries and states with better tax
incentives. The author states AB 1818 would require
businesses to administer research and development (R&D) at the
University of California (UC) level in order to qualify for
the bill's tax credit. According to the author, the direct
link with R&D and UCs would encourage investment in our
universities at a time when private investment has decreased.
The author notes eight nations, Belgium, China, France,
Ireland, Luxembourg, the Netherlands, Spain and Switzerland,
have enacted a similar credit, which has come to be known as
simply as a patent box, after the check-off on the tax form.
2)Background. A patent box simply means a tax incentive that
allows income from the sale of patented products to be taxed
at a lower rate than other income. Literally, it is a box on
the tax form for a qualified taxpayer to check. A patent box
differs from a research and development (R&D) credit. While a
R&D credit is intended to spur R&D activity, a patent or
innovation box is put in place to incentivize
commercialization of innovations, rather than just the conduct
of R&D.
3)Arguments in Support . The proponents of this bill, including
Technet and the University of California, argue AB 1818
provides incentives for emerging growth companies to
commercialize research performed in California public
universities, encouraging investment and positioning the state
to better convert its leadership in research into the
development of job-creating products and services.
According to proponents, the transfer of viable research
discoveries to the marketplace can pose the greatest challenge
to innovators and entrepreneurs, so providing an incentive for
these efforts through a tax credit on royalty payments to the
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UC has the potential to spawn greater investment in, and
broader commercialization of, inventions and discoveries.
Analysis Prepared by : Roger Dunstan / APPR. / (916) 319-2081