Massachusetts officials this week are expected to finalize regulations governing tax benefits for companies taking advantage of the $1 billion, 10-year Life Sciences Act enacted over the summer.
The Massachusetts Life Sciences Center, which oversees the Life Sciences Act, is scheduled on Dec. 16 to approve formal regulations for declaring life-sci companies as “certified,” and thus eligible for the tax breaks and other benefits provided by the law.
Certification lasts for five years and can be revoked by the center if a certified company’s promises “are materially at variance with the results after receiving certification,” the center said in its draft Life Sciences Tax Incentive Application Instructions.
The Life Sciences Act authorizes the center to offer life-sci companies at all stages of development up to a cumulative $25 million a year for 10 years in any combination of nine different tax incentives.
The regulations followed weeks of talks between the MLSC and the Massachusetts Biotechnology Council, the statewide group representing more than 500 life-sci employers, as well as vendors and professionals serving the industry.
“Some [biotech council members] wanted a little more clarity on what incentives, what programs they’d be applying for with the certification,” Sarah MacDonald, a spokeswoman for the biotech council, told BioRegion News in an interviewearlier this month. “It was a question of just making sure that everyone understands what filling out an application means.”
The talks, she said, concerned questions asked on the application life-sci companies must complete in order to be certified for benefits. One concerned a requirement that companies affirm that in carrying out construction and renovation projects, they hire “only … contractors and subcontractors that, to [the] applicant’s knowledge, provide their respective employees with prevailing wages.” Another rule requires life-sci companies to forfeit tax benefits if they do not create the number of promised jobs.
“Our members’ concern was [that they would] like to know up front what that process would be,” MacDonald said. “Would it be year one or do you get two or three years to prove you’re working toward the target?”
The center has reassured the MBC that it would be flexible in deciding whether and when it would rescind benefits from underperforming companies, a process typically called “clawback.”
“There’s flexibility on good faith: If a company benefited from state funding or tax incentives, et cetera, and didn’t reach certain goals because of an economic downturn or, in the case of the biopharma, because they projected more favorable results in a clinical trial and something went wrong, I don’t think that the state’s going to show up at their door,” said Joe Donovan, a counsel to the law firm Sullivan & Worcester based in its Boston office, and advisor to the biotech council on tax policy.
The center won’t discuss how the final certification application and instructions differ from the 11-page draft application until it releases the final guidelines Dec. 16.
Among benefits certified life-sci companies can receive under the law:
- A 10-percent life science-investment tax credit against individual or corporate excise taxes toward the cost of tangible depreciable property used exclusively within Massachusetts. The benefit is refundable up to 90 percent for companies with insufficient tax liability. That’s above the 3-percent credit offered in most areas of the state or the 5-percent credit available in Economic Opportunity areas;
- A credit of all of a drug company’s FDA “user” fees — such as application, establishment, product, and supplement fees — against individual or corporate excise taxes. This is a refundable benefit; if a company has insufficient tax liability to absorb the credit it may be made up to 90-percent refundable. A company must have incurred its R&D costs “primarily” in the Commonwealth and must commit to manufacturing the product in the Commonwealth;
- A research tax credit that could be 90 percent refundable if the credit exceeds the amount that may be claimed under Section 38M of Massachusetts General Law for a taxable year, at the option of the taxpayer and to the extent authorized under the life-sciences tax incentive program. Unexpired research credit carry-forwards from 2008 and earlier years can be made refundable in 2009 and thereafter;
- A new non-refundable research tax credit for “legally-mandated clinical trial activities” performed both inside and outside of Massachusetts. The credit can reduce the corporate excise to the minimum excise of $456 and may be carried forward for 15 years;
- A waiver from the state rule limiting the exemption from sales and use taxes to R&D entities that derive more than two-thirds of Massachusetts receipts from research and development, or that allocate more than two-thirds of their Massachusetts expenditures to their R&D activities, during a taxable year. A certified life sciences company can seek the exemption regardless of the form of entity the life sciences company has chosen, and whether or not the company meets the receipts or expenditures test;
- A non-refundable tax exemption for purchases of tangible personal property Purchases made on or after June 16 and used in connection with constructing, altering, remodeling, repairing or remediating research, development, or manufacturing facilities and utility support systems;
- A non-refundable deduction from state taxes for expenses incurred in clinical testing of drugs for a rare disease or condition that are also eligible for the federal orphan-drug credit. Massachusetts until now had had no such credit, and had historically disallowed a tax deduction for such expenses under a federal rule allowing their elimination in states with such credits to avoid conferring a double benefit;
- Elimination of the state’s “throwback” rule, which, for the purposes of sourcing income, reassigns receipts from sales outside of the state back to Massachusetts in cases where the company is not taxable in the destination state, and the taxpayer’s salesperson is not chiefly based at the taxpayer’s business premises outside of Massachusetts. This change “should decrease the tax base upon which such companies’ Massachusetts corporate excise is calculated;” and
- An extension of the period, from five to 15 years, during which life-sci companies can carry forward net operating losses.
The center is set to release its final guidelines around three weeks after the Massachusetts Department of Revenue issued its final Technical Information release detailing how plans to interpret sections of the Life Sciences Act covering the various tax incentives.
The final TIR, issued Nov. 24, followed weeks of talks between the revenue department and the Massachusetts Biotechnology Council.
The biotech council isn’t entirely satisfied with the outcome: Its tax advisor has cautioned that at least one of the approved regulations may hurt older companies seeking to extend their NOL carry-forwards. However, the provision is a key benefit to early-stage businesses, which typically lose money during the time — typically more than a decade — that it takes to pursue approvals for their first drugs.
“It is clear to us that the Act does not distinguish between unexpired and expired NOLs.”
Massachusetts agreed to extend its NOL carry-forward period from five to 15 years under the Life Sciences Tax Incentive Program included as part of the Life Sciences Act. But the revenue department rejected a request by the biotech council to apply the extension to any NOLs set to expire before the life-sci law took effect.
“Losses that may be eligible for this extended carry-forward will include only current losses and carryover losses which, as of January 1, 2009, or the date of certification, whichever is later, are unexpired from previous years and eligible to be carried forward,” the revenue department wrote in its final technical information release, issued Nov. 21.
In arguing for its preferred interpretation, the biotech council cited the text of the Life Sciences Act, signed into law by Gov. Deval Patrick in June [BRN, June 16]. The measure says that companies entitled to non-refundable NOL carry-forwards “for any taxable year may carry over and apply to its excise for any of the next succeeding 15 taxable years that portion, as reduced from year to year, of its credit which exceeds its excise for the taxable year.”
“The harm that could do to early-stage businesses will vary from company to company,” Sullivan & Worcester’s Donovan told BRN. “The ones that are going to be hurt are the ones that have been around a little longer and incurred the losses more than five years ago because there won’t be a way to revive them.”
“Unfortunately, [the revenue department] did not adjust the rule to accommodate our comment, and the comments that others made, that even expired NOLs could be revived under the program,” Donovan added. “We thought that was the best reading of the law, but they didn’t go that way.”
In an Oct. 20 letter to the chief of the revenue department’s rulings and regulations bureau Michael Fatale, John Heffernan, the biotech council’s vice president for policy and external affairs, said his group believes the law gives the life-sciences center “the discretion to permit any NOL to be carried forward and deducted for fifteen years, including losses that may otherwise have expired under existing law.”
“The only reasonable limitation, if any, on this discretion would be to restrict eligible NOLs to those incurred in tax years no earlier than fifteen years prior to the tax year for which the expanded NOL deduction is approved,” Heffernan wrote in the letter. “It is clear to us that the Act does not distinguish between unexpired and expired NOLs.”
The revenue department disagreed, maintaining its interpretation of the life-sci act both in its final technical study released last month, and a draft circulated a month earlier to industry leaders.
“An NOL that is five years or older will not be considered because DoR believes the intent of the credit is to stimulate and reward current activity, not to qualify older NOL's for a tax credit,” Robert Blish, a spokesman for the Massachusetts revenue department, told BRN last week via e-mail. “The TIR and [life sciences center] had a good discussion on this and our regs have been promulgated.”
Another series of questions by the biotech council concerns the annual $25 million cap on awards placed on the Massachusetts Life Sciences Center, which is responsible for overseeing the LSI. The council has asked DoR to clarify whether incentives to be awarded by the center will be counted toward the center’s cap on the basis of the year they are used, or the year they are granted.
According to the revenue department’s technical information release, the life-sciences center “may annually authorize tax incentives to certified life sciences companies, including incentives carried forward, refunded or transferred.”
Companies granted extensions of their NOL carry-forwards need not apply more than once to use them in multiple years, Blish added — a clarification sought by the industry.
Donovan said the biotech council and state officials will continue the dialogue they began during the drafting of the regulations this fall.
“There will be continuing dialogue, at least informal dialogue, and there may very well be … formal pronouncements on it as they get a little more practical experience,” he said. “It’s just inevitable the way these things work that as you go to an implementation stage, new issues pop up that have to be resolved.”