On June 16, 2008, Governor Deval Patrick signed An Act Providing for the Investment in and Expansion of the Life Sciences Industry in the Commonwealth (the “Act”). The Act provides for $1 billion in incentives to promote the development of the life sciences industry in Massachusetts, including $500 million in capital spending initiatives, $250 million in various tax incentives, and $250 million in science grants and small business assistance. The Act also significantly expands the activities of the Massachusetts Life Sciences Center (“MLSC”), which was created in June 2006, and outlines the certification process by which qualified life sciences companies may obtain the benefits provided for in the Act. This Client Advisory highlights the various tax incentives available to certified life sciences companies. The tax incentives provisions of the Act are effective January 1, 2009 through December 31, 2018.
The Act establishes the Life Sciences Tax Incentive Program pursuant to which the MLSC, in consultation with the Massachusetts Department of Revenue, may authorize tax incentives of up to $25 million each year for 10 years. Only “certified life sciences companies” are eligible for these tax incentives. The Act defines “life sciences” as advanced and applied sciences that expand the understanding of human physiology and have the potential to lead to medical advances or therapeutic applications including, but not limited to, agricultural biotechnology, biomedical engineering, biopharmaceuticals, biotechnology, genomics, marine biology, nanotechnology, RNA interference, stem cell research and veterinary science. A business corporation, partnership, firm, unincorporated association or other entity engaged in life sciences research, development, manufacturing or commercialization in Massachusetts may apply for certification as a “certified life sciences company” by submitting a “certification proposal” to the MLSC. A certification proposal must include an estimate of the projected new state revenue the life sciences company expects to generate during the period for which the company seeks certification, together with a plan by which the life sciences company proposes to achieve the projected new revenue, including for each tax year, an estimate of new commercial revenue that the Commonwealth would not otherwise have received and an estimate of the number of permanent full-time employees to be hired or retained. After review of a company’s certification proposal, the MSLC may, upon a majority vote of the board of directors of the MLSC, designate a life sciences company as a certified life sciences company. Certification is valid for 5 years beginning with the tax year in which certification is granted. Subject to the $25 million annual ceiling, the board of directors of the MSLC has complete discretion with regard to the number of incentives granted and the dollar amounts of such incentives.
The Act provides that certification may be revoked by the MLSC if the MLSC determines that representations made in a company’s certification proposal are materially at variance with the conduct of the life sciences company after receiving certification. In the event of revocation of certification by MLSC, the Commissioner of Revenue will, as of the effective date of the revocation, disallow any credits, exemptions, or other tax benefits allowed by the original certification. The Act provides that the Commissioner shall issue regulations concerning recapture of the value of tax benefits; in that regard, the Act directs that (i) recapture provisions of existing law with respect to investment tax credits shall apply, and (ii) where a sales and use tax exemption has been granted, the purchaser shall accrue use tax as of the date of revocation on a portion of the sales price that is proportionate to the remaining useful life of the property purchased.
The MLSC is in its formative stages and is still working out the details of how to best implement the various incentives provided for in the Act. In the meantime, a life sciences company should start preparing its certification proposal, which is required in order to be eligible for all of the tax incentives outlined below. In addition, to assist in the prepartion of its certification proposal, a life sciences company should register to receive e-mail updates from the MLSC by going to http://www.masstech.org/email_mlscenter.cfm.
Summary of Tax Incentives
Life Sciences Investment Tax Credit – the Act adds a new investment tax credit to the personal income tax and the corporate excise. This credit is equal to 10% of the cost of qualifying property acquired, constructed, reconstructed or erected during the taxable year and used exclusively in Massachusetts. If a life sciences investment tax credit exceeds the tax otherwise due under the personal income tax or the corporate excise, as applicable, 90% of the balance of such credit may, at the option of the taxpayer, be refundable to the taxpayer for the tax year in which the qualified property giving rise to such credit is placed in service. If such credit balance is refunded to the taxpayer, then the credit carryover provisions do not apply.
FDA User Fees Credit – the Act adds to the personal income tax and the corporate excise a new credit for user fees paid on or after the effective date of the Act (June 16, 2008) to the U.S. Food and Drug Administration (“U.S.F.D.A.”) upon submission of an application to manufacture a human drug in Massachusetts. The credit is equal to 100% of the user fees actually paid by the taxpayer and may be claimed in the taxable year in which the application for licensure of an establishment to manufacture the drug is approved by the U.S.F.D.A. To be eligible for the credit, more than 50% of the research and development costs for the drug must have been incurred in Massachusetts. Corporate and non-corporate taxpayers may use the FDA user fees credit to reduce their tax to zero. If the credit allowed exceeds the tax due, 90% of the balance of the credit may be refunded to the taxpayer for the taxable year in which the credit is claimed.
Extension of Net Operating Losses from 5 to 15 years – the Act allows a certified life sciences company to carry forward losses for up to 15 years (in lieu of the current 5-year carryforward).
Elimination of the Throwback Provision in the Sales Factor Used in Apportioning Corporate Income – in general, a company that has sales operations in Massachusetts is required to include certain sales to out-of-state customers in the numerator of the sales factor of the corporate apportionment formula if the company is not taxable in the state of the purchaser. The Act provides that a certified life sciences company will be deemed to be taxable in the state of the purchaser if the property is delivered or shipped to a purchaser in another state. As a result, such sales are not included in the numerator of the sales factor of the corporate apportionment formula.
Research and Development Credit Refundable – under current law, corporations may claim a credit based on qualified research expenditures and basic research payments. The Act includes a provision making the existing research and development credit refundable for a certified life sciences company. If the research and development credit exceeds the amount that may be claimed for a taxable year, 90% of the balance of such credit may, at the option of the taxpayer, be refunded.
Life Sciences Research Credit – the Act adds a new life sciences research credit to provide qualifying companies with a means to obtain a research credit for certain expenditures that do not qualify for the existing research and development credit. The life sciences research credit is generally calculated in the same manner as the research and development credit. However, for purposes of the life sciences research credit, research and development costs include qualified research expenditures that are performed both inside and outside of Massachusetts, to the extent they relate to legally mandated clinical trial activities. The life sciences research credit can reduce the corporate excise to the minimum excise of $456 and may be carried forward for 15 years. Unlike the regular research and development credit, the life sciences research credit is not refundable.
Deduction for Qualified Clinical Testing Expenses for Orphan Drugs – the Act provides a deduction for qualified clinical expenses for certain drugs for rare diseases or conditions. The amount of the deduction is based on the amount of the federal orphan drug credit allowable for the taxable year.
Life Sciences Companies Deemed to be Research and Development Corporations for Sales Tax Purposes – a certified life sciences company may be deemed a research and development corporation for purposes of the sales and use tax exemptions for materials, tools, fuel and machinery used in research and development.
Sales Tax Exemptions for Property for Use in the Development of Certain Facilities and Utility Systems – the Act includes a provision that exempts sales of tangible personal property purchased for a certified life sciences company for use in connection with the construction, alteration, remodeling, repair or remediation of research, development or manufacturing facilities and utility support systems from Massachusetts sales tax.