By Eric Anderson
From the coast to the heartland, state and local governments battle it out to attract biotech companies with tax and other financial incentives.
Project Right Now” is the name of the Sarasota County, FL, program created to attract and retain biotechnology companies that plan to create high-quality jobs. The name is appropriate; the county has been actively courting companies away from other biotechnology centers. For example, in partnership with the state of Florida, the county has considered a package of about $820,000 in tax refunds to entice Rapid Pathogen Systems to choose western Florida for a 175-job expansion in its medical research lab. The county is attempting to keep the company from choosing one of its other candidate locations, which include the well-known biotechnology locations in northern California, Boston, and the research triangle in North Carolina.
Open up just about any state or city economic development website, and you will find a focus on biotechnology. Ohio touts its “Rust Belt Renaissance: Biotech in the Buckeye State” noting its economic development initiatives. Kansas invested $580 million in the Kansas Bioscience Authority to target the industry with a variety of incentive programs. Sioux City metro lists biotechnology as the top target industry for Siouxland, noting tax and other incentives available in the tri-state area of South Dakota, Iowa, and Nebraska. San Francisco heralds its seven-and-a-half year exemption from the local payroll expense tax for companies engaged in qualified biotechnology research and development.
The bottom line is that biotech companies are in demand and should consider the availability of tax and other financial incentives that may significantly decrease the cost of doing business. These incentives generally fall into two categories: statutory and approved incentives.
Statutory incentives are usually composed of tax credits and other tax abatements that are available for any taxpayer who meets certain qualification criteria. These tax incentives generally provide a set benefit based upon the level of capital investment, increased employment, or some qualified activity. The following are the most common statutory incentives available to biotechnology companies.
Biotechnology Equipment Sales Tax Exemptions: Several states provide for an exemption from the sales and use taxes that vary in scope. Colorado provides a refund of its 2.9% state sales and use tax for tangible property that is used directly and predominantly for biotechnology research and development in Colorado. Several other states provide for exemptions from tax, allowing companies to reduce the cost of purchasing qualified property at the time acquired by providing an exemption certificate to the seller.
Biotechnology Property Tax Exemptions: Several states and localities provide exemptions from the state ad valorem taxes on property used in qualified biotechnology and/or qualified research and development activities.
Hiring Credits: Several states provide hiring credits that are generally tied to increasing headcount and may be enhanced for biotechnology companies. For example, Idaho provides a two-tier income tax credit of $500 to $1,000 for each additional headcount that is available to biotechnology companies.
Research and Experimentation Credits: About half of the states provide research tax credits for expenses incurred in qualified research and development activities. While the percentages differ, many of the programs provide a credit of up to 15% of qualified research expenditures that may be applied against the income tax. Some states, like New Mexico and Washington, provide credits that apply against nonincome taxes, reducing the cost of doing business whether or not a company is paying income taxes.
Enterprise Zones: Certain areas have been designated by a state or locality as favored economic development zones. California provides for hiring credits that may be about $37,000 for each qualified employee hired to work in an enterprise zone.
Approved incentives are generally pools of funding set aside by state and local governments that are deployed at the discretion of the government agency. The tax incentives may be similar to statutory programs, but may not have a defined amount and may require an application or other pre-approval. Other nontax incentives may be tied to assistance with infrastructure or funding for workforce expansion and training.
Massachusetts has created one of the most robust programs, the $1 billion Life Sciences Initiative. For companies that apply with the Massachusetts Life Sciences Council and attain certification as a Certified Life Sciences Company, the state provides the Life Sciences Accelerator grants to early-stage companies, a refundable 10% investment tax credit, a refundable research tax credit, special sales tax exemptions, extended net operating loss carryovers to 15 years, a refundable FDA user fee credit, a life sciences research credit, an income tax deduction for orphan drug clinical testing, and elimination of sales factor throwback that would reduce income assigned to Massachusetts for income tax purposes. These incentives are on top of other programs that are not specifically tailored toward biotechnology and life sciences companies, including training grants, a general 3% investment tax credit for manufacturers that may be enhanced in certain areas, and other general development grants.
The following are some common negotiated incentives.
Training Grants: Funding for training is a favorite economic development tool across the country. The states view training a highly skilled workforce in emerging technologies as a key tool to lure employers to their state. Biotechnology is a focus area for many states. For example, California provides training funding through the Employment Training Panel, an agency that allocates a pool of funding at rates that range from $8 to $27 per hour, depending upon the training provided. With limited funding, the Panel allocates funds first to priority industries like biotechnology and related fields.
Negotiated Property Tax Abatements: Companies adding equipment in certain locations may achieve a reduction or exemption from property taxes for a number of years as part of a negotiated inducement to locate in a particular city or county. For example, South Carolina provides the FILOT program, which allows companies to pay a fee in lieu of the property tax at an amount that is a fraction of the tax that would normally apply. Companies must apply for this incentive prior to making the capital investment, and the approval process may require resolutions to provide the funding passed by the city or county governments. San Antonio is known for enticing companies with property tax abatements that can last a decade or more.
Preapproved Income Tax Credits or Refunds: Several states have programs that require application for funding or an available pool of tax credits. In some cases, applications must be made by a particular deadline. In other cases, the state may retroactively certify an incentive that a company is entitled to by statute even though it is subject to approval. New Mexico falls into both categories. The state provides incentives including up to about $4,000 per each new high-wage employee hired after July 1, 2004. This credit may be paid in cash if not used as a tax offset. New Mexico also offers a technology jobs credit and a capital investment credit that requires application by Dec. 31 of the year following the year for which the application is made.
Be Proactive To Get The Best Incentives Package
Companies that locate in a particular area and hire a workforce many times find that they have missed the opportunity to earn statutory incentives or negotiate an incentives package. The following steps may be followed when considering any location or expansion:
Assemble the team — There will be several stakeholders in the site selection process. Consider involving individuals from operations, accounting and tax, human resources, and government affairs. Consider using an outside consultant.
Identify sites that are real contenders — The state and local governments tend to be more diligent in finding funding sources and assisting in the incentive approval processes when they are in competition. In some cases, considering a viable alternative location is a requirement to obtain incentives. It is important that the alternatives be realistic – a company that wants to hire 200 Ph.D.s should not offer a tiny town that is nowhere near a university as a competing location to a major metropolitan area.
Specifically identify the expected investment to the best of your ability — Determine the headcount, education level, wages, and benefits for the new workforce. Assemble budgets for new equipment, the facility, and operating costs.
Prepare an economic impact analysis for the new location — This is the tax revenue that the location may generate from the new location. This would include not only the taxes paid by the business but also the taxes paid by the employees themselves. This step arms the company with powerful information that may significantly impact any negotiation for competitive funding.
Identify and contact the relevant state and city economic development agencies, and negotiate the incentives available.
Prepare timelines and a process for the awarded incentives — There will be relevant dates, applications, and milestones.
Claim the benefits — Many negotiated or statutory incentives go unclaimed.
Whether Sarasota, Sioux City, or San Jose, the states and cities want your business … and they’re willing to pay for it.
About The Author
Eric Anderson leads the San Francisco Bay Area state and local tax practice of WTAS. He focuses on income tax planning and compliance, sales and use tax transaction planning, mergers and acquisitions, franchise tax matters, and administrative tax controversies.