THE GENERAL ASSEMBLY OF PENNSYLVANIA

HOUSE BILL

INTRODUCED BY SIMMONS, SAYLOR, BLOOM, BOYD, BRENNAN, CALTAGIRONE, CHRISTIANA, CLYMER, CUTLER, FLECK, GINGRICH, GROVE, HARHART, KAMPF, KAUFFMAN, M. K. KELLER, LAWRENCE, LONGIETTI, MAJOR, MARSICO, PAYTON, PETRARCA, PICKETT, QUINN, READSHAW, REED, ROSS, SCHRODER, K. SMITH, STEVENSON AND WAGNER, NOVEMBER 9, 2011

REFERRED TO COMMITTEE ON FINANCE, NOVEMBER 9, 2011  

AN ACT

Amending Title 12 (Commerce and Trade) of the Pennsylvania

Consolidated Statutes, providing for a research and

development tax credit; and making related repeals.

The General Assembly of the Commonwealth of Pennsylvania

hereby enacts as follows:

Section 1.  Title 12 of the Pennsylvania Consolidated

Statutes is amended by adding a chapter to read:

CHAPTER 43

RESEARCH AND DEVELOPMENT TAX CREDIT

Sec.

4301.  Scope of article.

4302.  Definitions.

4303.  Credit for research and development expenses.

4304.  Carryover, carryback, refund and assignment of credit.

4305.  Application of Internal Revenue Code.

4306.  Determination of qualified research and development

expenses.

4307.  Time limitations.

4308.  Transitional rule.

4309.  Limitation on credits.

4310.  Pass-through entity.

4311.  Report to General Assembly.

4312.  (Reserved).

4313.  Regulations.

§ 4301.  Scope of article.

This article relates to research and development tax credits.

§ 4302.  Definitions.

The following words and phrases when used in this chapter

shall have the meanings given to them in this section unless the

context clearly indicates otherwise:

"Department."  The Department of Revenue of the Commonwealth.

"Gross receipts."  Gross receipts for any taxable year shall

consist only of gross receipts which are effectively connected

with the conduct of a trade or business within this

Commonwealth. The determination of whether gross receipts are

effectively connected with the conduct of a trade or business

within this Commonwealth shall be made by reference to the

standard established in section 401(3)2(a)(16) and (17) of the

Tax Reform Code.

"Internal Revenue Code."  The Internal Revenue Code of 1986

(Public Law 99-514, 26 U.S.C. § 1 et seq.).

"Pass-through entity."  A partnership as defined in section

301(n.0) of the Tax Reform Code or a Pennsylvania S corporation

as defined in section 301(n.1) of the Tax Reform Code.

"Pennsylvania base amount."  Base amount as defined in

section 41(c) of the Internal Revenue Code of 1986 (Public Law

99-514, 26 U.S.C. § 41(c)), except that references to "qualified

research expense" shall mean "Pennsylvania qualified research

and development expense" and references to "qualified research"

shall mean "Pennsylvania qualified research and development."

References to "fixed base percentage" shall mean the percentage

which the Pennsylvania qualified research and development

expense for the four taxable years immediately preceding the

taxable year in which the expense is incurred is to the gross

receipts for such years. The fixed base percentage for a

taxpayer who has fewer than four but at least one taxable year

shall be determined in the same manner using the number of

immediately preceding taxable years to arrive at the percentage.

"Pennsylvania qualified research and development."  Qualified

research and development as defined in section 41(d) of the

Internal Revenue Code of 1986 (Public Law 99-514, 26 U.S.C. §

41(d)) that is conducted in this Commonwealth.

"Pennsylvania qualified research and development expense."

Qualified research expenses as defined in section 41(b) of the

Internal Revenue Code of 1986 (Public Law 99-514, 26 U.S.C. §

41(b)) incurred for Pennsylvania qualified research and

development.

"Qualified tax liability."  The liability for taxes imposed

under Article III, IV or VI of the Tax Reform Code. The term

shall not include any tax withheld by an employer from an

employee under Article III.

"Research and development tax credit."  The credit provided

under this chapter.

"Secretary."  The Secretary of Revenue of the Commonwealth.

"Small business."  A for-profit corporation, limited

liability company, partnership or proprietorship with net book

value of assets totaling, at the beginning or end of the taxable

year for which Pennsylvania qualified research and development

expense is incurred, as reported on the balance sheet, less than

$5,000,000.

"Tax Reform Code."  The act of March 4, 1971 (P.L.6, No.2),

known as the Tax Reform Code of 1971.

"Taxpayer."  An entity subject to tax under Article III, IV

or VI of the Tax Reform Code. The term shall include the

shareholder of a Pennsylvania S corporation that receives a

research and development tax credit.

§ 4303.  Credit for research and development expenses.

(a)  Application.--A taxpayer who incurs Pennsylvania

qualified research and development expense in a taxable year may

apply for a research and development tax credit as provided

under this chapter. By September 15, a taxpayer must submit an

application to the department for Pennsylvania qualified

research and development expense incurred in the taxable year

that ended in the prior calendar year.

(b)  Amount.--The following apply:

(1)  Except as provided under paragraph (2), a taxpayer

that is qualified under subsection (a) shall receive a

research and development tax credit for the taxable year in

the amount of 10% of the excess of the taxpayer's total

Pennsylvania qualified research and development expense for

the taxable year over the taxpayer's Pennsylvania base

amount.

(2)  A taxpayer that is a small business and is qualified

under subsection (a) shall receive a research and development

tax credit for the taxable year in the amount of 20% of the

excess of the taxpayer's total Pennsylvania qualified

research and development expense for the taxable year over

the taxpayer's Pennsylvania base amount.

(c)  Notification.--By December 15 of the calendar year

following the close of the taxable year during which the

Pennsylvania qualified research and development expense was

incurred, the department shall notify the taxpayer of the amount

of the taxpayer's research and development tax credit approved

by the department.

§ 4304.  Carryover, carryback, refund and assignment of credit.

(a)  Carryover.--If the taxpayer cannot use the entire amount

of the research and development tax credit for the taxable year

in which the research and development tax credit is first

approved, then the excess may be carried over to succeeding

taxable years and used as a credit against the qualified tax

liability of the taxpayer for those taxable years. Each time

that the research and development tax credit is carried over to

a succeeding taxable year, it shall be reduced by the amount

that was used as a credit during the immediately preceding

taxable year. The research and development tax credit may be

carried over and applied to succeeding taxable years for no more

than 15 taxable years following the first taxable year for which

the taxpayer was entitled to claim the credit.

(b)  Application.--A research and development tax credit

approved by the department for Pennsylvania qualified research

and development expense in a taxable year first shall be applied

against the taxpayer's qualified tax liability for the current

taxable year as of the date on which the credit was approved

before the research and development tax credit is applied

against any tax liability under subsection (a).

(c)  Carry back or refund.--A taxpayer is not entitled to

carry back or obtain a refund of an unused research and

development tax credit.

(d)  Sale or assignment.--A taxpayer, upon application to and

approval by the Department of Community and Economic

Development, may sell or assign, in whole or in part, a research

and development tax credit granted to the taxpayer under this

chapter. The Department of Community and Economic Development

shall establish guidelines for the approval of applications

under this subsection.

(e)  Claim.--The purchaser or assignee of a portion of a

research and development tax credit under subsection (d) shall

immediately claim the credit in the taxable year in which the

purchase or assignment is made. The amount of the research and

development credit that a purchaser or assignee may use against

any one qualified tax liability may not exceed 75% of the

qualified tax liability for the taxable year. The purchaser or

assignee may not carry over, carry back, obtain a refund of or

assign the research and development tax credit. The purchaser or

assignee shall notify the department of the seller or assignor

of the research and development tax credit in compliance with

procedures specified by the department.

§ 4305.  Application of Internal Revenue Code.

The provisions of section 41 of the Internal Revenue Code of

1986 (Public Law 99-514, 26 U.S.C. § 41) and the regulations

promulgated regarding those provisions shall apply to the

department's interpretation and administration of the research

and development tax credit. References to the Internal Revenue

Code shall mean the sections of the Internal Revenue Code as

existing on any date of interpretation of this chapter, except

that if those sections of the Internal Revenue Code referenced

in this chapter are repealed or terminated, references to the

Internal Revenue Code shall mean those sections last having full

force and effect. If after repeal or termination the Internal

Revenue Code sections are revised or reenacted, references in

this chapter to Internal Revenue Code sections shall mean those

revised or reenacted sections.

§ 4306.  Determination of qualified research and development

expenses.

In prescribing standards for determining which qualified

research and development expenses are considered Pennsylvania

qualified research and development expense for purposes of

computing the research and development tax credit, the

department may consider:

(1)  The location where the services are performed.

(2)  The residence or business location of the person or

persons performing the service.

(3)  The location where qualified research and

development supplies are consumed.

(4)  Other factors that the department determines are

relevant for the determination.

§ 4307.  Time limitations.

A taxpayer shall not be entitled to a research and

development tax credit for Pennsylvania qualified research and

development expenses incurred in taxable years ending after

December 31, 2015. The termination date in section 41(h) of the

Internal Revenue Code of 1986 (Public Law 99-514, 26 U.S.C. §

41(h)) shall not apply to a taxpayer who is eligible for the

research and development tax credit for the taxable year in

which the Pennsylvania qualified research and development

expense is incurred.

§ 4308.  Transitional rule.

For the purpose of calculating Pennsylvania qualified

research and development expense used in calculating the

Pennsylvania base amount for taxable years ending after 1991 and

before 1997, if the taxpayer has incurred qualified research and

development expense both inside and outside this Commonwealth

and is unable to determine the amount of Pennsylvania qualified

research and development expense, the taxpayer may calculate

Pennsylvania qualified research and development expense by

multiplying qualified research and development expense

everywhere by the average of the payroll and property factors

calculated in accordance with Article IV of the Tax Reform Code 

for the corresponding taxable years in question.

§ 4309.  Limitation on credits.

(a)  Total.--The total amount of credits approved by the

department shall not exceed $55,000,000 in any fiscal year. Of

that amount, $11,000,000 shall be allocated exclusively for

small businesses, except that if the total amounts allocated to

either the group of applicants exclusive of small businesses or

the group of small business applicants is not approved in any

fiscal year, the unused portion shall become available for use

by the other group of qualifying taxpayers.

(b)  Allocation for taxpayers.--If the total amount of

research and development tax credits applied for by all

taxpayers, except for small businesses, exceeds the amount

allocated for those credits, the research and development tax

credit to be received by each applicant shall be the product of

the allocated amount multiplied by the quotient of the research

and development tax credit applied for by the applicant divided

by the total of all research and development credits applied for

by all applicants, the algebraic equivalent of which is:

taxpayer's research and development tax credit = amount

allocated for those credits X (research and development

tax credit applied for by the applicant/total of all

research and development tax credits applied for by all

applicants).

(c)  Allocation for small business taxpayers.--If the total

amount of research and development tax credits applied for by

all small business taxpayers exceeds the amount allocated for

those credits, the research and development tax credit to be

received by each small business applicant shall be the product

of the allocated amount multiplied by the quotient of the

research and development tax credit applied for by the small

business applicant divided by the total of all research and

development credits applied for by all small business

applicants, the algebraic equivalent of which is:

taxpayer's research and development tax credit = amount

allocated for those credits X (research and development

tax credit applied for by the small business/total of all

research and development tax credits applied for by all

small business applicants).

§ 4310.  Pass-through entity.

(a)  Election.--If a pass-through entity has any unused tax

credit under section 4304 (relating to carryover, carryback,

refund and assignment of credit), the entity may elect, in

writing, according to the department's procedures, to transfer

all or a portion of the credit to shareholders, members or

partners in proportion to the share of the entity's distributive

income to which the shareholder, member or partner is entitled.

(b)  Additional credit.--The credit provided under subsection

(a) shall be in addition to any research and development tax

credit to which a shareholder, member or partner of a pass-

through entity is otherwise entitled under this chapter, except

that a pass-through entity and a shareholder, member or partner

of a pass-through entity may not claim a credit under this

chapter for the same qualified research and development expense.

(c)  Claim.--A shareholder, member or partner of a pass-

through entity to whom credit is transferred under subsection

(a) must immediately claim the credit in the taxable year in

which the transfer is made. The shareholder, member or partner

may not carry forward, carry back, obtain a refund of or sell or

assign the credit.

§ 4311.  Report to General Assembly.

The secretary shall submit an annual report to the General

Assembly indicating the effectiveness of the credit provided

under this chapter no later than March 15 following the year in

which the credits were approved. The report shall include the

names of all taxpayers utilizing the credit as of the date of

the report and the amount of credits approved and utilized by

each taxpayer. Notwithstanding any law providing for the

confidentiality of tax records, the information contained in the

report shall be public information. The report may also include

any recommendations for changes in the calculation or

administration of the credit.

§ 4312.  (Reserved).

§ 4313.  Regulations.

The secretary shall promulgate regulations necessary for the

implementation and administration of this chapter.

Section 2.  Repeals are as follows:

(1)  The General Assembly declares that the repeals under

paragraphs (2) and (3) are necessary to effectuate the

addition of 12 Pa.C.S. Ch. 43.

(2)  Article XVII-B of the act of March 4, 1971 (P.L.6,

No.2), known as the Tax Reform Code of 1971, is repealed.

(3)  Section 1602-H of the act of April 9, 1929 (P.L.343,

No.176), known as The Fiscal Code, is repealed.

Section 3.  The addition of 12 Pa.C.S. Ch. 43 is a

continuation of Article XVII-B of the act of March 4, 1971

(P.L.6, No.2), known as the Tax Reform Code of 1971. The

following apply:

(1)  Except as otherwise provided in 12 Pa.C.S. Ch. 43,

all activities initiated under Article XVII-B of Tax Reform

Code of 1971 shall continue and remain in full force and

effect and may be completed under 12 Pa.C.S. Ch. 43. Orders,

regulations, rules and decisions which were made under

Article XVII-B of Tax Reform Code of 1971 and which are in

effect on the effective date of section 2(2) of this act

shall remain in full force and effect until revoked, vacated

or modified under 12 Pa.C.S. Ch. 43. Contracts, obligations

and collective bargaining agreements entered into under

Article XVII-B of Tax Reform Code of 1971 are not affected

nor impaired by the repeal of Article XVII-B of Tax Reform

Code of 1971.

(2)  Except as set forth in paragraph (3), any difference

in language between 12 Pa.C.S. Ch. 43 and Article XVII-B of

Tax Reform Code of 1971 is intended only to conform to the

style of the Pennsylvania Consolidated Statutes and is not

intended to change or affect the legislative intent, judicial

construction or administration and implementation of Article

XVII-B of Tax Reform Code of 1971.

(3)  Paragraph (2) does not apply to the addition of 12

Pa.C.S. § 4312.

Section 4.  This act shall take effect in 60 days.