SF 228 (LSB 1701XS (5) 87)

SENATE FILE 228

BY  LOFGREN

A BILL FOR

An Act relating to economic development by providing an adjustment to net income for certified suppliers of anchor manufacturers for purposes of state taxation and including retroactive applicability provisions.
BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA:

    Section 1.  Section 2.48, subsection 3, Code 2017, is amended by adding the following new paragraph:
   NEW PARAGRAPH.  0h.  In 2019, the economic development program for certified suppliers of anchor manufacturers available under sections 15.226 through 15.229 and the related adjustments to net income provided in section 422.7, subsection 59, and section 422.35, subsection 26.
    Sec. 2.  NEW SECTION.  15.226  Definitions.
   For purposes of this part:
   1.  “Anchor manufacturer” means a business that meets all of the following:
   a.  Manufactures tangible personal property at a facility in Iowa.
   b.  Exports at least fifty percent of the tangible personal property manufactured at the facility to markets outside of the state.
   2.  “Certified supplier” means a business certified pursuant to section 15.227.
   3.  “Facility” means a building or buildings located in the state at which tangible personal property is manufactured for sale within or without the state of Iowa.
   4.  “Manufactured” or “Manufactures” means adding value to personal property through a process of manufacturing, refining, purifying, combining of different materials, the packaging of meats, extracting and recovering natural resources, and all processes of fabricating and curing, with a view to selling the property for gain or profit.
   5.  “Tangible personal property” means the same as defined in section 422.33, subsection 2, paragraph “b”, subparagraph (3).
    Sec. 3.  NEW SECTION.  15.227  Certification of suppliers.
   1.  A business meeting the requirements of subsection 2 may apply to the authority, no later than ninety days after the end of a tax year of the business, for certification under this section. If a business applying to the authority meets the requirements of subsection 2, the authority shall issue a certificate to the business stating that the business is a certified supplier.
   2.  To receive certification as a certified supplier, a business must meet all of the following for the tax year immediately preceding the tax year for which the requested certificate will be valid:
   a.  The business manufactures tangible personal property at a facility in Iowa.
   b.  The business derives more than ten percent of its gross sales of tangible personal property manufactured at a facility in Iowa from sales to anchor manufacturers. For purposes of the requirement in this paragraph, a business may aggregate gross sales to more than one anchor manufacturer.
   c.  All sales by the business to anchor manufacturers are arm’s length transactions.
   d.  The business provides all of the following:
   (1)  A statement or statements from one or more anchor manufacturers, signed by an officer or authorized representative of the anchor manufacturer, attesting that the anchor manufacturer meets the definition of anchor manufacturer under section 15.226. The business shall provide statements from as many anchor manufacturers to which the business makes sales as collectively represents more than ten percent of the business’s gross sales of tangible personal property manufactured at a facility in Iowa.
   (2)  Supporting documentation in a form prescribed by the authority.
   e.  The business meets one of the following criteria:
   (1)  At least ten percent of the total payroll of the business is located in the state.
   (2)  The business employs at least fifty employees at a facility in the state.
   f.  The business agrees to annually provide to the authority information and data on jobs created and capital investments made in the state by the business. The information and data shall be in a form prescribed by the authority.
   g.  The business is not an anchor manufacturer.
   3.  A certificate is valid for one tax year and shall include an expiration date. Reapplication may be made each year for certification under this part. The department of revenue shall accept a validly issued, unexpired certificate issued under this section.
   4.  The authority shall not issue certificates pursuant to this section for tax years beginning on or after January 1, 2020.
    Sec. 4.  NEW SECTION.  15.228  Eligibility for adjustment to net income of certified suppliers.
   1.  A certified supplier shall be eligible to make the adjustment to net income in section 422.35, subsection 26, for a tax year if all the following apply:
   a.  The certified supplier’s net business income for the tax year, allocated and apportioned to this state under section 422.33, subsection 2, paragraph “a”, subparagraph (2), computed without regard to section 422.35, subsection 26, increased by more than five percent over the certified supplier’s net business income in the prior year, allocated and apportioned to this state under section 422.33, subsection 2, paragraph “a”, subparagraph (2).
   b.  The certified supplier includes a copy of a valid, unexpired certificate issued under section 15.227 with the certified supplier’s tax return required under chapter 422.
   2.  A taxpayer who is a shareholder in a subchapter S corporation that is a certified supplier shall be eligible to make the adjustment to net income in section 422.7, subsection 59, for a tax year if all the following apply:
   a.  The certified supplier’s net business income for the tax year, allocated and apportioned to this state under section 422.33, subsection 2, paragraph “a”, subparagraph (2), computed without regard to section 422.35, subsection 26, increased by more than five percent over the certified supplier’s net business income in the prior year, allocated and apportioned to this state under section 422.33, subsection 2, paragraph “a”, subparagraph (2), which prior year’s allocation and apportionment shall be computed with regard to section 422.35, subsection 26, if the subchapter S corporation was a certified supplier in the previous tax year and met the eligibility requirements in this paragraph “a”.
   b.  The shareholder includes a copy of a valid, unexpired certificate issued under section 15.227 with the shareholder’s tax return required under chapter 422.
   3.  For purposes of establishing eligibility under this section, “net business income” shall not include any income of a certified supplier that is attributable to an existing trade or business or income-producing contract that was acquired by the certified supplier through merger or acquisition during or after the first year for which the certified supplier becomes eligible pursuant to this section for the adjustments to net income in section 422.7, subsection 59, or section 422.35, subsection 26.
    Sec. 5.  NEW SECTION.  15.229  Rules.
   The authority and the department of revenue may adopt rules pursuant to chapter 17A to administer this part.
    Sec. 6.  Section 257.21, subsection 2, Code 2017, is amended to read as follows:
   2.  The instructional support income surtax shall be imposed on the state individual income tax for the calendar year during which the school’s budget year begins, or for a taxpayer’s fiscal year ending during the second half of that calendar year and after the date the board adopts a resolution to participate in the program or the first half of the succeeding calendar year, and shall be imposed on all individuals residing in the school district on the last day of the applicable tax year. As used in this section, “state individual income tax” means the taxes computed under section 422.5, without regard to the adjustment to net income in section 422.7, subsection 59, less the amounts of nonrefundable credits allowed under chapter 422, division II, except for the Iowa taxpayers trust fund tax credit allowed under section 422.11E.
    Sec. 7.  Section 422.7, Code 2017, is amended by adding the following new subsection:
   NEW SUBSECTION.  59.  a.  If the adjusted gross income includes income from a subchapter S corporation for which the taxpayer is a shareholder, which subchapter S corporation is a certified supplier that meets the requirements in section 15.228, subsection 2, paragraph “a”, the taxpayer may subtract an amount based on the taxpayer’s pro rata share of the profits or losses from the subchapter S corporation equal to the difference between the subchapter S corporation’s net business income for the tax year, allocated and apportioned to this state under section 422.33, subsection 2, paragraph “a”, subparagraph (2), computed without regard to section 422.35, subsection 26, and one hundred five percent of the subchapter S corporation’s net business income for the prior tax year, allocated and apportioned under section 422.33, subsection 2, paragraph “a”, subparagraph (2), which prior year’s allocation and apportionment shall be computed with regard to section 422.35, subsection 26, if the subchapter S corporation was a certified supplier in the previous tax year and met the requirements in section 15.228, subsection 2, paragraph “a”. A taxpayer who is a resident shall not make the subtraction provided in this subsection unless the taxpayer also makes an election pursuant to section 422.5, subsection 1, paragraph “j”, subparagraph (2).
   b.  For purposes of the adjustment provided in this subsection, “net business income” shall not include any income of a certified supplier that is attributable to an existing trade or business or income-producing contract that was acquired by the certified supplier through merger or acquisition during or after the first year for which the certified supplier becomes eligible for the adjustment in this subsection.
    Sec. 8.  Section 422.35, Code 2017, is amended by adding the following new subsection:
   NEW SUBSECTION.  26.  a.  If the taxpayer is a certified supplier that meets the requirements in section 15.228, subsection 1, subtract an amount equal to the difference between the taxpayer’s net business income for the tax year, allocated and apportioned under section 422.33, subsection 2, paragraph “a”, subparagraph (2), computed without regard to this subsection, and one hundred five percent of the taxpayer’s net business income for the prior tax year, allocated and apportioned under section 422.33, subsection 2, paragraph “a”, subparagraph (2).
   b.  For purposes of the adjustment provided in this subsection, “net business income” shall not include any income of a certified supplier that is attributable to an existing trade or business or income-producing contract which was acquired by the certified supplier through merger or acquisition during or after the first year for which the certified supplier becomes eligible for the adjustment in this subsection.
    Sec. 9.  Section 422D.2, Code 2017, is amended to read as follows:
   422D.2  Local income surtax.
   A county may impose by ordinance a local income surtax as provided in section 422D.1 at the rate set by the board of supervisors, of up to one percent, on the state individual income tax of each individual residing in the county at the end of the individual’s applicable tax year. However, the cumulative total of the percents of income surtax imposed on any taxpayer in the county shall not exceed twenty percent. The reason for imposing the surtax and the amount needed shall be set out in the ordinance. The surtax rate shall be set to raise only the amount needed. For purposes of this section, “state individual income tax” means the tax computed under section 422.5, without regard to the adjustment to net income in section 422.7, subsection 59, less the amounts of nonrefundable credits allowed under chapter 422, division II, except for the Iowa taxpayers trust fund tax credit allowed under section 422.11E.
    Sec. 10.  RETROACTIVE APPLICABILITY.  This Act applies retroactively to January 1, 2017, for tax years beginning on or after that date.
EXPLANATION
The inclusion of this explanation does not constitute agreement with
the explanation’s substance by the members of the general assembly.
   This bill creates an economic development program that allows a certified supplier to make an adjustment to net income for state individual and corporate income tax purposes. The adjustment is available for corporations and shareholders of subchapter S corporations.
   To qualify as a certified supplier under the bill, a business must meet several requirements. The business must manufacture tangible personal property in Iowa but cannot be an anchor manufacturer. The business must derive more than 10 percent of its gross sales from sales to anchor manufacturers, and all such sales must be arm’s length transactions. The business must supply the authority with signed statements from a certain number of anchor manufacturers attesting to certain information as prescribed in the bill and must agree to annually provide to the authority information and data on jobs and capital investments made in the state by the business. Finally, the business must maintain at least 10 percent of its payroll in Iowa or employ at least 50 employees in Iowa.
   “Anchor manufacturer” is defined as a business that manufactures tangible personal property in Iowa and exports at least 50 percent of the tangible personal property manufactured in Iowa outside of the state.
   A business that meets all of the qualifications of a certified supplier may annually apply to the authority to receive a certificate labeling the business as a certified supplier. A business must apply for a certificate no later than 90 days after the end of its tax year. The certificate is valid for one year and shall include an expiration date.
   The certified supplier will be entitled to make an adjustment to its net income if it includes the valid, unexpired certificate with its tax return, and if its net business income allocated and apportioned to this state, computed without regard to the adjustment to net income provided in the bill, increased by more than 5 percent over its prior year net business income allocated and apportioned to this state.
   If both requirements are met, the certified supplier is entitled to subtract from its net income an amount equal to the difference between its current year net business income allocated and apportioned to this state, computed without regard to the adjustment to net income provided in the bill, and 105 percent of its prior year net business income allocated and apportioned to this state. This net income adjustment does not take into account any income attributable to an existing trade or business or income-producing contract which was acquired by the certified supplier through merger or acquisition during or after the first year for which the certified supplier became eligible for the net income adjustment. Finally, the bill excludes this net income adjustment from the calculation of the school district income surtaxes in Code sections 257.21 (instructional support program), 257.29 (educational improvement program), and 298.2 (physical plant and equipment levy), and the emergency medical services income surtax in Code chapter 422D, so that revenues from those taxes will not be reduced as a result of the net income adjustment.
   The economic development authority shall not issue certificates for tax years beginning on or after January 1, 2020. The bill includes the certification program and its related income tax adjustments on the list of tax expenditures that the legislative tax expenditure committee is required to review during 2019.
   The bill provides the authority and department of revenue with rulemaking authority.
   The bill applies retroactively to January 1, 2017, for tax years beginning on or after that date.