TAX INCENTIVES FOR HIGH TECHNOLOGY BUSINESSES

Chapter Four

PROGRAM UTILIZATION AND TAX IMPACTS

High Technology Sales/Use Tax Exemption

During calendar year 1995, the first year the program was effective, 45 applications were received for the High Technology Sales/Use Tax Exemption program. During calendar year 1996 there were 39 new applications received. Through May 1997 there were 6 additional applications. Two program applications were denied because of late filing and 4 applications were withdrawn.

The 84 applications approved to date are in the following areas of technology:

   ADVANCED COMPUTING      34
   ADVANCED MATERIALS        1
   BIOTECHNOLOGY                  28
   ELECTRONIC DEVICES         19
   ENVIRONMENTAL TECH        2

 

FISCAL IMPACT

During calendar year 1995, 9 projects were completed; 28 projects were completed during calendar year 1996. It is estimated that 38 projects will be completed during 1997 with the remaining 9 projects currently approved being completed during 1998. The estimated amount of state and local sales tax exempted for the projects now total $72.6 million for the 84 projects that have been approved. The sales tax impact data are based on amounts indicated in the firms’ applications and have not yet been spread over time to reflect the actual construction schedules. Few audits of completed projects have yet been completed, so it is premature to know the actual impact on sales tax receipts.

It should be noted that only 64 businesses participate in the sales/use tax exemption. This means that some businesses have more than one project in the program. The tax impact by year is indicated in the following table.


ESTIMATED TAX IMPACT
State and Local Sales/Use Tax
By Calendar Years
Year       Amount           Projects
                                                   1995    $ 3,358,207           9 
                                                   1996     14,272,975         28
                                                   1997     28,477,609         38
                                                   1998     26,405,291           9

LOCATION OF BUSINESSES

Most of the businesses taking the sales and use tax exemption are distributed throughout the Seattle-Bellevue-Redmond area of King County. Exhibit One on the following page shows graphically how these businesses are distributed. The 64 businesses shown below differ from the count of projects because some businesses have multiple projects in the program. In table form the distribution is shown below:


LOCATION OF BUSINESSES TAKING
SALES/USE TAX EXEMPTION
County                   Businesses
                                                       King                        53
                                                       Kittitas                      1
                                                       Pierce                       2
                                                       San Juan                    1
                                                       Snohomish                 3
                                                       Spokane                     1
                                                       Whatcom                   3
                                                       Total                        64

Exhibit One.        Location of Businesses Taking High Tech
                Sales/Use Tax Exemption.

High Technology Business and Occupation Tax Credit

Through March of 1997, 410 businesses have participated in the B&O tax credit for research and development. Not all of these firms have participate every year and not all of the firms have been in existence since the program’s inception. For the last full year of activity, calendar year 1996, the following counts of technologies were provided by firms or estimated by DOR staff.

   ADVANCED COMPUTING      207
   ADVANCED MATERIALS        14
   BIOTECHNOLOGY                    41
   ELECTRONIC DEVICES          105
   ENVIRONMENTAL TECH        27
   TOTAL                                      394

Several firms indicated that they were involved in multiple technologies so the technology counts above exceeds the firm count. During 1996 there were 352 different firms that took the R&D credit.

REVENUE IMPACT

Tax credits taken are as follows:

   CY 1995         $13.3 million
   CY 1996         15.3
   CY 1997          4.4 (partial year)

On a fiscal year basis $3.3 million in credits were taken in FY 1995 and $14.5 million in credits were taken during FY 1996. Many firms took credits after the eligible year when they discovered they were eligible for the credit or it was discovered during an audit. This explains why the calendar year (report period) credits are significantly different than fiscal year credits. The following pie chart indicates the distribution of credits during the first two calendar year of the program according to the five eligible technology areas.

Table 4.1 shows a summary of firms’ activity by technology by apportioning the activity that firms indicated on their affidavit equally across the indicated technologies. For example, if a firm indicated that it participated in three technologies, the information about the firm was apportioned one-third to each technology.

LOCATION OF FIRMS TAKING THE CREDIT

While widely distributed geographically in the state, most businesses taking the B&O tax credit are located in western King County. Exhibit Two illustrates how participants are distributed geographically. In table form the distribution is shown below. It should be noted that this distribution is based on the firm’s tax return mailing address which may be to its out of state headquarters office or tax preparer. Firms are not eligible to take credit for research and development performed out of state.

Table 4.1

Summary Of High Technology Firm Activity By Technology

Calendar Years

ADVANCED COMPUTING

ADVANCED MATERIALS

BIOTECHNOLOGY

ELECTRONIC DEVICES

ENVIRONMENTAL TECHNOLOGY

TOTALS

1996 TOTAL ALLOCATED GROSS INCOME

$ 7,241,871,800

$ 268,235,793

$ 742,345,955

$ 3,465,920,926

$ 235,602,150

$ 11,953,976,624

1996 GROSS ELIGIBLE R&D SPENDING

$ 1,087,730,221

$ 40,855,836

$ 251,601,597

$ 310,198,116

$ 37,948,829

$ 1,728,334,599

R&D SHARE OF GROSS INCOME

15.0%

15.2%

33.9%

8.9%

16.1%

14.5%

1996 POTENTIAL CREDITS

$ 26,610,324

$ 438,464

$ 4,633,390

$ 7,172,022

$ 365,789

$ 39,219,989

1996 ACTUAL CREDITS TAKEN

$ 6,505,863

$ 302,688

$ 2,252,959

$ 6,040,964

$ 221,401

$ 15,323,876

CREDITS TAKEN AS SHARE OF POTENTIAL

24.4%

69.0%

48.6%

84.2%

60.5%

39.1%

1995 ACTUAL CREDITS TAKEN

$ 5,690,395

$ 269,284

$ 2,070,934

$ 4,818,699

$ 478,327

$ 13,327,640

1996 ACTUAL CREDITS TAKEN

$ 6,505,863

$ 302,688

$ 2,252,959

$ 6,040,964

$ 221,401

$ 15,323,876

1995-1996 GROWTH RATE

14.3%

12.4%

8.8%

25.4%

-53.7%

15.0%

TOTAL TECHNOLOGY COUNT

TOTAL COMPANY COUNT

1995 TECHNOLOGIES INDICATED

173

11

34

89

30

337

303

1996 TECHNOLOGIES INDICATED

207

14

41

105

27

394

352

1995-1996 GROWTH RATE

19.7%

27.3%

20.6%

18.0%

-10.0%

16.9%

16.2%


LOCATION OF FIRMS TAKING
B&O TAX CREDIT
County

Businesses

Adams 1
Benton 11
Chelan 2
Clark 8
Franklin 1
Grant 1
Island 2
Jefferson 1
King 263
Kitsap 11
Kittitas 1
Klickitat 1
Lewis 3
Out of State 31
Pierce 5
San Juan 1
Skagit 1
Snohomish 38
Spokane 9
Thurston 5
Walla Walla 1
Whatcom 5
Whitman 4
Total 410


Exhibit Two.        Location of Businesses Taking High Tech
                B&O Credit.