Ruling 97-6, Corporation Business Tax / Research and Experimental Expenditure Credit
A company (the "Company") provides pathology testing services to physicians and managed care organizations. The Company tests blood, tissue and other specimens furnished by the service recipients and prepares a comprehensive report which it provides to the service recipients. The Company’s services are used by physicians who are screening for cancer, forecasting the course of an existing cancer or testing for the recurrence of a previously treated cancer in a specific patient.
Whether a provider of pathology testing services which are used by physicians and managed care organizations in the diagnosis, prognosis, monitoring and general management of diseases and other clinical conditions qualifies as a "biotechnology company" for the purposes of Conn. Gen. Stat. § 12-217j.
Conn. Gen. Stat. § 12-217j allows to any corporation a corporation business tax credit that is equal to twenty per cent of the excess of (A) the amount spent during the income year by the corporation directly on research and experimental expenditures, as defined in 26 U.S.C. § 174, where the research and experimentation are conducted in Connecticut, over (B) the amount spent during the immediately preceding income year by the corporation directly on such research and experimental expenditures, where the research and experimentation are conducted in Connecticut.
For most corporations, any portion of the credit that is not used (because, e.g., the amount of the credit exceeds the tax otherwise due and owing) may not be carried forward to succeeding income years. A "biotechnology corporation", however, may carry any portion of the credit that is not used "forward to each of the successive income years until such credit, or applicable portion of the credit, is fully taken," Conn. Gen. Stat. § 12-217j, but, "[in no case shall a credit, or any portion of a credit, that is not used by a biotechnology company be carried forward for a period of more than fifteen years." Id. For the purposes of Conn. Gen. Stat. §12-217j, "biotechnology company" means:
a company engaged in the business of applying technologies, such as recombinant DNA techniques, biochemistry, molecular and cellular biology, genetics and genetic engineering, biological cell fusion techniques, and new bioprocesses, using living organisms, or parts of organisms, to produce or modify products, to improve plants or animals, to develop microorganisms for specific uses, to identify targets for small molecule pharmaceutical development, or to transform biological systems into useful processes and products or to develop microorganisms for specific uses."
(Emphasis added). This is essentially the same definition used to define biotechnology in Conn. Gen. Stat. §12-412(89) for the purpose of the sales and use taxes. The highlighted verbs -- "to produce or modify," "to improve," "to develop," "to identify" and "to transform" -- indicate that the exemption was intended for activities that would lead towards progress in the area of biotechnology, as opposed to merely diagnosing illnesses in specific patients.
To the extent that the language of the exemption may be ambiguous, it is appropriate to review the intent of the General Assembly in enacting it. ("It is fundamental that statutory construction requires us to ascertain the intent of the legislature and to construe the statute in a manner that effectuates that intent." Petco Insulation Co. v. Crystal, 231 Conn. 315, 321, 649 A.2d 790 (1994).) The legislation enacting the tax credit was part of an initiative to promote the "cluster-based development" of the biotechnology industry, as one of the "new industries of the future." 39 H.R. Proc., Pt. 14, 1996 Sess., pp. 4742-4744 (remarks of Rep. Merrill, who introduced the bill). According to Representative Merrill, "cluster-based development" is a "broad-based range of industries that interact together, both in terms of market, in terms of product development, in terms of research and development." Id. at p. 4744. The biotechnology "cluster" was chosen as one of the first industries to receive a legislative incentive, because Connecticut already possesses the "synergism" to attract biotechnology companies in its quality of life, its educational institutions and the pharmaceutical manufacturers already located here. Id. at pp. 4759-4760 (remarks of Rep. Ward). It appears from the legislative history, as well as the General Assembly’s choice of the types of activities listed in the statute, that the tax credit was intended to benefit companies that engage in biotechnology research and development focusing on producing products (whether or not such production will be done by the business engaging in the research and development).
The Company fails to meet the definition of a "biotechnology company," because the Company does not produce or modify products, does not develop microorganisms for specific uses, does not identify targets for small molecule pharmaceutical development and does not transform biological systems into useful processes and products. The Company provides testing services and then turns its findings over to physicians to use in diagnosis, prognosis, monitoring and general management of a disease. A tax credit, like an exemption, is a matter of legislative grace and thus is strictly construed against the taxpayer. See New England Yacht Sales, Inc. v. Commissioner of Revenue Services, 198 Conn. 624, 637, 504 A.2d 506 (1986).
Because the Company fails to meet the definition of a "biotechnology company", it may take the corporation business tax credit for research and experimental expenditures in the year the credit is earned but it may not carry forward the credit for a period of 15 years.
A provider of pathology testing services which are used by physicians and managed care organizations in the diagnosis, prognosis, monitoring and general management of diseases and other conditions does not qualify as a "biotechnology company" for the purposes of Conn. Gen. Stat. §12-217j.
December 31, 1997