Chapter One


Pursuant to RCWs 82.04.4452(8) and 82.63.020, the Department of Revenue is required to perform three assessments on the tax credit and exemption programs authorized under RCW 82.04.4452 (High Technology Business and Occupation Tax Credit) and RCW 82.63 (High Technology Sales/Use Tax Deferral/Exemption). The assessments are required to take place in 1997, 2000, and 2003 and are due in September of each year. This report is the first in the series of three analyses of these programs.

The assessments are required to measure the effect of each program on job creation, the number of jobs created for Washington residents, company growth, the introduction of new products, the diversification of the state’s economy, growth in research and development investment, the movement of firms or the consolidation of firms’ operations into the state, and such other factors as the department selects.


Sales Tax Deferral/Exemption

One of the two tax incentive programs enacted by the 1994 Legislature for high technology firms provided a deferral of retail sales and use tax for investment in research activities in one of five areas: advanced computing, advanced materials, biotechnology, electronic device technology or environmental technology. The deferral was allowed for capital expenditures related to research and development or for pilot scale manufacturing facilities. The following year the deferral was converted to an outright exemption, as long as the firm continues to use the facility for a qualified purpose. Unlike the current sales tax exemption for manufacturing machinery and equipment, the statute does not provide exemption for repairs or replacement of high technology equipment.

Firms must make application for sales tax exemption with the Department of Revenue prior to purchasing research and development equipment or starting construction of R&D or pilot scale manufacturing facilities.

Since the effective date of January 1, 1995, 84 applications for exemption have been approved; these represent only 64 companies because some firms have multiple projects. Thirty-four of the participants are firms engaged in advanced computing; another 28 are biotech companies. Together, these represent nearly three-quarters of all applicants.

A total of $72.6 million in state and local sales/use tax has been approved for exemption for the 84 projects; approximately $53.6 million of the tax reduction is for the state tax and $19.0 million is attributable to local taxes. Fifty-three of the 64 companies that are participating are headquartered in King County. The remaining 11 firms are located in six other counties. However, some of the 20 multiple projects could also be located in other counties.

B&O Tax Credit

The second program features a credit against state business and occupation tax for costs incurred in research and development activities by companies engaged in the same five high technology areas as the sales tax exemption. Such expenditures must exceed 0.92 percent of the firm’s taxable gross income derived from within the state. For proprietary businesses the credit is calculated by applying the B&O tax rate for manufacturing, 0.484 percent, to the amount of qualified R&D expenditures; nonprofit corporations and associations apply the B&O service rate of 1.75 percent (1.5 percent as of July 1, 1998). The maximum amount of credit for a firm is $2 million per year, and the credit must be used in the same calendar year as the expenditure was made. If a firm does not have sufficient B&O tax liability to utilize the entire credit amount, the excess may not be carried forward to subsequent years.

Prior application is not required; instead firms attach an affidavit that details the credit calculation to their state combined excise tax return when it is submitted to the Department.

Since the effective date of January 1, 1995, approximately 410 firms have utilized the B&O tax credit. As for the sales tax exemption program, the largest technology area is represented by firms engaged in advanced computing; these firms represent over one-half of all companies that have claimed the credit. Companies that develop electronic devices are the second largest recipients of the tax credit; these are followed by biotech firms. The areas of advanced materials and environmental technology have only a handful of companies that have claimed the credit.

To date, the impact of the tax credit has been a reduction in state general fund revenues of approximately $33 million. This amounts to an average tax savings of roughly $80,000 per participant.

Participants have largely been confined to two counties: King with nearly two-thirds of all credit recipients and Snohomish with nine percent. Tied for third place in utilization of the credit are Benton and Kitsap with 11 companies each.


Because of the very limited data which the programs have generated to date, broader economic analysis of the tax incentive programs will have to wait until future years. There is information for only two full calendar years, 1995 and 1996, which is inadequate to establish trend-lines. Further, employment data for calendar year 1996 is not yet available from the Employment Security Department, so analysis of job impacts is largely conjecture at this time. Also, because participation has been limited to a very small number of companies, it is difficult to obtain measurable economic data for these investments. More detail analysis will also have to wait until more projects are completed, and audits can be conducted to assure that the reported impact data are accurate. Also, in future reports we plan on surveying program participants to obtain their perspective on the effectiveness of the incentives and their recommendations on areas of possible improvement. Chapter 5 does look at some of the indicators of program success.

Job Creation. In terms of estimated new jobs reported by participants, the sales tax exemption has generated in excess of 5,000 new jobs. Using industry-wide employment data, it is inferred that 300-400 new jobs may be linked to firms that have taken the B&O tax credit. However, it is too soon to tell whether these are new, permanent positions or simply represent shifts of other employees into temporary positions.

Employment Growth. Available data indicates that firms which have utilized these tax incentives have enjoyed very high rates of growth in recent year and have paid very high wages to their employees (average in excess of $71,000 in 1995). While some of the participating companies are very large, the average employment per firm in these high tech industries is around 100. The median number of jobs per firm is only six employees.

Company Growth. High tech companies in general have exhibited high rates of growth, both in terms of number of new firms and income of existing firms. Somewhat ironically, the growth rate of gross income for industries which are typically considered as heavily involved in high tech activities has slowed in the past year or two. This demonstrates the lead time which is necessary for investment in R&D activities to become reflected in company income.

R&D Investment. Based on the information available to date, gross income for firms taking the B&O tax credit appears to be growing at roughly the same rate as income for all firms in the five high technology areas. However, because the lag time between the R&D activity and commercial production can often take at least 3 - 5 years for many new products (longer if patents and/or FDA approval must be obtained), it is too early to expect to see results of the incentives on investment in R&D. Therefore, it is premature to analyze the impact the R&D investment may have on growth for participating companies.

Product Line Diversification. Data to demonstrate new products that result from R&D investments is not yet available. When more firms have participated in the programs, the Department will survey these companies and attempt to learn more about new products that can be attributable to these investments. At the present time, there is insufficient information to form any conclusions about new products.

Economic Diversification. Similarly, there is very little data to indicate greater diversification of Washington’s economy - either from the perspective of growth in traditionally weaker industries or growth in counties that have traditionally been economically distressed. One measure of the result of R&D activities may be the issuance of new patents. Data presented in Chapter 5 serve to establish baseline information for patents on a per capita basis. This may yield significant information to determine whether more innovation has occurred outside of the Puget Sound/I-5 corridor to whether most of the growth continues to be confined to this region of the state. The information available so far indicates that roughly 75 percent of recent patents have been granted to firms in King, Snohomish and Clark counties. This is approximately the same distribution of firms that have participated in the two tax incentive programs.

Comparison of patent data for all states indicates that new issuances to Washington firms during 1995 and 1996 were 14 percent higher than the trend line for earlier years in the 1990s. In fact, only one other state of comparable size - Indiana - had a higher growth rate in patents issued during the latest two years. While it is too soon to attribute this result to the tax incentive programs, it may represent a positive trend which can be correlated with participation in the incentive programs.