Assault on the B&O High Technology Tax Credit

By Bob Heller and Dan Wright at Clark Nuber, and Joe Wallin and Garry Fujita at DWT

The high technology B&O tax credit has long been a useful tool to encourage investment by Washington’s high technology companies in research and development of innovative goods and services. Fostering investment in high technology research and development leads to increased exports of goods and services while maintaining or expanding jobs and the tax base in Washington State. Both new businesses and established businesses have benefited from growing their activities because of this credit.

However, a bill introduced in the legislature seeks to limit the tax benefits in magnitude as well as availability to small businesses, HB 2532.

What is HB 2532?

If enacted into law, HB 2532 would impose three important limitations on the existing credit:

  • It limits the credit to only those companies that have $25 million or less in annual revenue during the prior year (currently no limit).
  • It restricts the amount of credit that can be claimed by a taxpayer in any one year to $400,000 (currently $2 million).
  • A taxpayer may only take the credit for a total of eight consecutive years, including years prior to the effective date of the law.

What Does HB 2532 Do?

The limitations listed above would significantly reduce the number of taxpayers eligible for the credit, appearing to target the credit only to start-up companies. The credit would no longer be available as an incentive for many smaller companies and all larger companies to continue to invest in Washington R&D activities.

However, the bill goes further. Taxpayers who would lose the credit under the bill have an opportunity to regain some that was lost if they contribute to the “opportunity expansion program” under Washington’s Opportunity Scholarship Act. This program is designed to address shortages in high employer demand fields of study, particularly in the science, technology, engineering, mathematics and health care fields. The credit is available on a dollar-for-dollar basis for contributions up to the lesser of a taxpayer’s B&O tax liability, or $2.5 million. Unused credits may be carried over to subsequent tax years until fully utilized.

On the face of it, this might appear to be a good trade-off. Enhancing Washington’s skilled workforce may well be a good policy objective and providing a tax benefit for those who help fund the effort is a sensible way to incentivize companies to invest in higher education. However, it will also have the effect of reducing research, development and production in Washington’s high technology sector.

It’s Up To You

It would seem that HB 2532 wants the taxpayer to decide between investing in higher education in lieu of research, development and production or in research, development and production in lieu of higher education, all in order to try to keep the tax burdens roughly in balance. Of course, there’s nothing in the bill that would prevent a taxpayer from continuing to do the research, development and production in Washington without the tax incentive and also make contributions to the higher education fund. It is an interesting gamble.

It is quite possible that a taxpayer could choose to conduct the research, development and production in a state trying to attract such activities and also make no contribution to the fund. Washington could lose on two counts with respect to that taxpayer; the business expansion and jobs would leave Washington (and the associated taxes) and there would be no contribution to the higher education fund.

Bob Heller at Clark Nuber – 425.454.4919
Dan Wright at Clark Nuber – 425.709.4800
Joe Wallin at DWT – 206.757.8184
Garry Fujita at DWT – 206.757.8046

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  • http://www.grigsbylawgroup.com/ Grigsby Law Group

    This bill is still in it’s prenatal stages and should be given time to be refined before we toss out judgments, however if the bill passes ‘as-is’ (never happen) it would crush this country’s R&D advancements. 

  • Bob Heller

    The prime sponsor of HB 2532, Representative Reuven Carlyle, has pointed out to us that the high technology B&O credit is set to expire January 1, 2015.  HB 2532 is Representative Carlyle’s attempt to secure the future of the credit in some form, while achieving some laudable goals in higher education funding.  He believes that extending the credit in its existing form will be unlikely in light of expected future budget pressures.  We understand that Representative Carlyle will offer an amendment to the bill that will retain the current $2 million maximum credit allowance, as well as eliminate the $25 million revenue cap and eight year limit for eligibility from the original version of the bill.  Instead, companies taking the credit with annual revenues in excess $25 million will be required to contribute a portion of the value of the credit taken (90% for companies with revenues of $100 million or more) to the opportunity scholarship board.  The amendment would also eliminate the requirement to file an annual survey with the Department of Revenue in order to claim the credit.

 
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