Colorado Legislative Council Staff

STATE and LOCAL

REVISED FISCAL IMPACT

(replaces fiscal impact dated January 24, 1999)

TITLE:            CONCERNING THE EXEMPTION OF TANGIBLE PERSONAL PROPERTY TO BE USED FOR BIOTECHNOLOGICAL PURPOSES FROM SALES AND USE TAX.

Summary of Legislation

            This bill, as amended in the Senate Finance Committee, exempts all sales of tangible personal property purchased by any company to be used in Colorado directly and predominately in research and development of biotechnology from the state sales and use tax, effective July 1, 1999. Biotechnology is defined to mean the application of technologies to produce or modify products, to develop microorganisms for specific uses, to identify targets for small molecule pharmaceutical development, or to transform biological systems into useful processes or products; and the potential endpoints of the resulting products; processes, microorganisms, or targets are for improving human or animal health care outcomes. The sales tax exemption would apply to capital equipment, instruments, apparatus, and supplies used in laboratories, including microscopes, machines, glassware, chemical reagents, computers, computer software, and technical books and manuals.

            The bill would reduce state General Fund revenues, and have a similar effect on local governments whose sales and use tax is collected by the state Department of Revenue. Therefore, the bill is assessed as having state and local fiscal impact.

State Revenues

            It is projected that the bill will reduce state sales tax revenue by $907,120 in FY 1999-00, and by $935,241 in FY 2000-01.

            Background. Based on “New Directions 98 - The Twelfth Biotechnology Industry Annual Report”, a total of $7.9 billion is spent annually on research and development in the biotechnology industry. With 118,000 employees in the industry, this amounts to approximately $67,000 per employee. A Colorado Association of Commerce and Industry (CACI) report has identified 26 Colorado companies with 1,344 employees, based on the definition of biotechnology for improving human health care outcomes. As a double-check, the Colorado Advanced Technology Institute (CATI) estimates approximately 24 firms in the state with 1,364 employees, based on the publication “Colorado Biomedical Buyer - Supplier Guide”. An additional 30 companies concentrate on agricultural, plant, or other research not involved in human health care. The definition of biotechnology in the bill as amended, that would also include biotechnology for animal health care outcomes, would add an additional ten companies, employing 496 people to the sales tax exemption.

            Excluding wages and salaries, it is assumed that $17,000 per employee is spent by biomedical companies in Colorado on expenditures that would be exempt by the bill. Therefore, a total of $31,280,000 in research and development expenditures would be affected by the bill ($17,000 R&D per employee x 1,840 employees = $31,280,000). The state sales tax rate of 3.0 percent would yield $938,400 in sales tax paid on these purchases. After deduction of the sales tax vendors’ discount (3.33 percent of taxable retail sales), the actual annual state General Fund revenue reduction as a result of the exemption is estimated to be $907,120. Of course, as the industry grows in Colorado, and additional biotechnology companies enter the state, the value of the sales tax exemption would increase accordingly.

State Expenditures

            State expenditures will be unaffected by the bill.

Other State Impacts

            Under current law, SB97-1 requires the diversion of 10 percent of sales tax revenues to the Highway User Tax Fund for use on highway projects. This bill will reduce state sales tax revenues beginning in FY 1999-00, and will therefore, reduce the amount of state funds available for the SB 97-1 diversion. Additionally, the reduced state revenues will mean a reduction of the amount of state funds required to be refunded to taxpayers under the terms of TABOR, and less state funds will be available for capital construction needs. Table 1 summarizes the net impact of this bill on these state obligations. The changes in Table 1 are changes from a base that includes continuing capital construction projects.

Table 1. Additional Impact of SB 99-127 (millions of dollars)

Local Government Impact

            The Department of Revenue collects the sales tax for statutory cities and counties throughout the state, as well as for the Regional Transportation District, the Scientific and Cultural Facilities District, and Denver Metropolitan Major League Baseball Stadium District. The same exemptions that apply at the state level would also apply to the collection of local sales taxes for these local governments. No estimate has been made regarding the amount of sales tax revenue losses to these local governments.

State Appropriations

            The fiscal note would imply that no appropriations or spending authority are required in FY 1999-00 to implement the provisions of the bill.

Departments Contacted

            Revenue          Legislative Council Staff