On June 16, 2008, Massachusetts Governor Deval Patrick signed into law an Act Providing for the Investment in and Expansion of the Life Sciences Industry in the Commonwealth (the Act). Beginning January 1, 2009, the Act provides $25 million each year in various tax incentives for qualifying companies involved in life sciences. Qualifying companies without taxable income may obtain cash payments under several of the incentives. More information regarding the Act can be found in McDermott’s On the Subject “Massachusetts Enacts Comprehensive $1 Billion Life Sciences Initiative.”
In late November 2008, the Massachusetts Life Sciences Center (MLSC) released a draft application for certification and participation in the Life Sciences Tax Incentive Program. The draft can be downloaded from the MLSC website. The MLSC will begin taking electronic applications on January 2, 2009.
Providing additional guidance to applicants, the Massachusetts Department of Revenue (DOR) has released Technical Information Release 08-23, which gives a summary of the tax incentives LSTIP offers, including a life sciences investment tax credit, a credit for U.S. Food and Drug Administration (FDA) user fees, an extension of Net Operating Losses (NOLs) from five to 15 years, an elimination of the sales throwback provision, a refund for §38M research credit, a credit for life science research, certain deductions for expenses related to testing orphan drugs, and sales tax exemptions for property used in developing some types of facilities and utility systems.
A summary of the draft application is provided below. In short, life science companies wishing to apply for the incentives should identify operations or specific projects for which they will seek grants and tax incentives, and begin to collect the information necessary to complete the draft application. This includes economic benefits that the state should obtain by granting the incentives, follow-on sources of investment and anticipated gains in manufacturing in the life sciences sector, descriptions of their businesses and technologies, details of their environmental policies and outlines of their plans to promote best practices in corporate governance.
MLSC has stated that companies should assume that the public may have access to data contained in any documents submitted to MLSC, and it is unclear what means will exist for protection of confidential data necessary to the completion of the application. Also, by signing and submitting their applications, applicants consent to the DOR releasing information contained in their tax filings to MLSC and other entities. MLSC states that it will keep such tax information confidential and use the information it acquires only for evaluating and administering the LSTIP. By signing applications, representatives of applicants agree to bind their companies to the procedures that MLSC has established for handling materials and not to hold MLSC liable in the event that it discloses any submitted materials either as a consequence of the submissions or upon the applicants’ selection as grantees.
The MLSC has asked for comments with respect to the draft application.
Summary of the Draft Application
Certification (Part I)
Part I of the draft application concerns certification. In order to qualify for LSTIP tax incentives, companies must meet certain criteria before MLSC will designate them “Certified Life Science Companies” and provide them with five-year certifications.
Part I of the draft application requires the following information:
- Five year forecasts of revenue generation, job growth and taxable income
- Brief summaries of the applicants’ businesses and product lines, including North American Industry Classification System (NAICS) codes
- Information regarding the applicants’ Massachusetts facilities
- GAAP-compliant revenue projections of the applicants’ Massachusetts operations
- Business plans, containing objectives and criteria of how the businesses plan to earn the revenue calculated in their five-year plan and estimates of commercial revenue directly attributable to their Massachusetts operations
- The number of and salaries for the employees that they anticipate hiring or retaining for each of the next five years in the event that MLSC grants them tax incentives
- Estimates of the aggregate annual taxable income these employees will create
- The applicants’ plans to recruit employees and attain diversity in their workforce
- Disclosure of any agreements the applicants have made with financial institutions under the Massachusetts Capital Access Program and any approvals they have received from the Economic Assistance Coordinating Counsel (EACC)
- Certificates of Good Standing to show that they have made all necessary tax filings and have no unpaid tax liabilities
Tax Incentives (Part II)
In order to obtain tax benefits under the Act, applicants also must file part two of the draft application. Part II requires short descriptions of any projects that provide the basis of the tax benefits sought, including details of specific projects or investment plans, anticipated expenses, and strategic plans. In addition, applicants must provide brief descriptions of the economic benefits that the state will realize for any specific project that underlies an application.
Part II also requires applicants to rank their preferences for the various benefits, estimate the dollar amounts of the benefit sought for the taxable year 2009, and calculate the expected cumulative dollar value of the benefit over their lifetime. Applicants that have projects in state Economic Target Areas (ETAs), or that anticipate having them, should note this fact and specify whether the EACC has certified the projects. In addition, applicants must describe any efforts they have made or propose to make to recruit employees from communities within ETAs.
Supplemental Information (Part III)
The MLSC requires applicants to provide concise descriptions of how they may advance innovation in the life sciences, including how they may improve technologies in life sciences or how they may play transformative roles in the treatments of particular diseases or medical conditions. Applicants must provide short descriptions explaining how they may use additional sources of capital for their ventures or the specific projects for which they seek tax benefits under the Act. Furthermore, applicants must explain how they may draw new investment into Massachusetts and may encourage manufacturing in the life sciences within the state.
Applicants also need to provide an overview, no longer than three pages, outlining their businesses and technologies. Moreover, applicants must disclose certain government actions to which they are subject. If applicable, applicants must give summaries of their environmental policies and their plans to minimize any adverse environmental effects resulting from their or their suppliers’ operations. Applicants must also explain how they will encourage corporate governance ideals, including those relating to accounting, board composition and employee behavior.
The final application for certification and participation in the LSTIP will not be available until January 1, 2009. As stated, the MLSC will begin taking electronic applications on January 2, 2009. Interested life sciences companies should consider whether to comment on the draft application, and begin collecting the information necessary to complete the applications. Because the available funding pool for grants and tax incentives may be limited, life sciences companies wishing to apply for the incentives should move quickly.