On June 16, 2008, Massachusetts Governor Deval Patrick signed into law legislation (.pdf) that provides a total of $1 billion over the next ten years to support the development of the life sciences industry in Massachusetts. The legislation, commonly known as the Life Sciences Initiative (LSI), is designed to stimulate research, development, manufacturing, and commercialization in the life sciences sector and, ultimately, to increase employment and associated tax revenues. To achieve these goals, the LSI significantly expands the activities of the recently created Massachusetts Life Sciences Center (LSC) by dramatically increasing the funding available for capital expenditures, grant programs and other incentives. The LSI also establishes an aggressive set of tax incentives that include a broad array of refundable and other types of tax credits.
The following is a summary of the key provisions of the LSI that may be of particular interest to our biotechnology and medical device clients seeking either to relocate to Massachusetts or to expand their existing facilities here.
I. Overview of Funding
The LSI’s $1 billion in funding for the life sciences industry consists of three primary components:
- $500 million in bond-financed capital expenditures for improvements in public research, medical, and educational facilities and in public infrastructure supporting existing life sciences activities ($299.5 million has been earmarked by the Legislature for specific improvements);
- $250 million over ten years in tax incentives, to be evenly allocated at a rate of $25 million per year, and awarded at the discretion of the LSC to “certified life science companies” undertaking projects that meet the overall goals of the LSI (See Section III.A below); and
- $250 million over ten years in funding to be awarded by the LSC to certified life sciences companies for qualified investments, grants, research, and other funding and loans designed to advance life sciences in the Commonwealth, all through expenditures from the Massachusetts Life Sciences Investment Fund (See Section III.B below).
II. Overview of Eligibility for Tax and Other Incentives under the LSI - Certified Life Sciences Companies
Eligibility for financial support or tax incentives under the LSI is dependent upon a life sciences company being first approved by the LSC as a “certified life sciences company.” The approval process is based on an application by the Company concerning its proposed life sciences project in the Commonwealth, including:
(a) an estimate of the projected new state review the company expects to generate during the proposed certification period by way of the proposed project;
(b) an estimate of the number of permanent full-time employees to be hired or retained;
(c) an estimate of the projected average salaries of said employees;
(d) an estimate of the projected taxable income generated by the employees; and
(e) the life sciences company’s potential to further technological advancements and medical breakthroughs in the life sciences.
Certification decisions will be made by the LSC’s Board of Directors, and are valid for five years. Certification may be revoked after a determination by the LSC that the life sciences company has failed to meet the performance standards set forth in the application and approved by the LSC. In such cases, the Commonwealth is entitled to disallow and recapture the tax credits, grants, loans, and other benefits awarded to the company.
III. Overview of the Benefits Available to Certified Life Sciences Companies
A. Life Sciences Tax Incentive Program
Certified life sciences companies are eligible for a broad range tax incentives to be awarded at the discretion of the LSC. Eligibility for the tax incentives begins as of January 1, 2009, and expires as of December 31, 2018. The LSC may issue up to $25 million in aggregate tax incentives each year, without any limit on the amount of tax incentives that may be awarded to any particular company each year. The tax incentives include the following:
(a) Investment Tax Credits in the amount of 10% of the cost of tangible personal property acquired or constructed in a tax year. Such credits may be carried forward for a period of ten years. Alternatively, a company without sufficient tax liability against which to apply its credits may opt for a refund in the amount of 90% of its excess credits.
(b) Research and Development Tax Credits that are available to certified life sciences companies and that exceed the amount that may otherwise be allowed against tax liability are refundable at the rate of 90%.
(c) U.S.F.D.A. User Fee Tax Credits equal to 100% of any user fees paid by the company in connection with submission of human drug applications. This credit may be carried forward for a ten-year period, and excess credits are refundable at a rate of 90%.
(d) Extension of Net Operating Loss (NOL) Carry-Forward Provisions that would permit a certified life sciences company to carry forward net operating losses to offset future corporate income for a period of up to 15 years. The existing statute permits such extensions for only five years.
(e) Sales Tax Exemptions for certified life sciences companies, including for purchases made on equipment for the construction, alteration, or repair of research, development, or manufacturing facilities and associated utility support systems.
(f) Deductions for Clinical Testing Expense on Orphan Drugs that will allow companies a tax deduction for qualified clinical testing expenses associated with drugs developed to treat rare diseases or conditions.
(g) Tax Credits for Clinical Trial Expenses that will permit companies to take tax credits for the cost of legally mandated clinical trial activities in amounts determined according to a sliding scale formula, with a fifteen year carryforward period for excess credits.
(h) Exemption from the Sales Throwback Provision of the apportionment formula for companies that deliver their products to states other than Massachusetts.
B. Life Sciences Investment Program
In addition to eligibility for tax incentives, a certified life sciences company may receive direct financial support from the LSC through the Life Sciences Investment Program, which is funded through the Massachusetts Life Sciences Investment Fund (MSLIF). Financial assistance from the program may take a variety of forms, including direct grants, loans, credit support through the issuance of loan guarantees, loan insurance or reinsurance, and (in limited circumstances for small businesses) direct equity investment.
Specifically, under the Life Sciences Investment Program, the LSC is authorized to provide financial assistance in a number of areas, including:
- financing for the construction or expansion of new research and development facilities;
- targeted investments for the development of devices, drugs and therapeutics and manufacturing activities;
- matching grants to colleges and non-profit entities related to the expansion of research and development; and
- grants to certified life sciences companies for site remediation, preparation and ancillary infrastructure improvement projects.
Funding for the MSLIF will be provided by an annual, statutory allocation out of the consolidated net budget surplus remaining at the end of any fiscal year up to $25 million per year.
C. Other Provisions
In addition to providing financial support to private companies operating in the life sciences sector, the LSI charges the LSC more broadly to employ the Massachusetts Life Sciences Investment Fund to support life sciences development throughout the Commonwealth by funding a variety of research and educational activities in the field.
The types of support contemplated by the LSI includes targeted equity investments and matching grant programs for small businesses, grants and loans to support academic research, educational programs, scholarships for graduate study, international trade initiatives, and the development of regional innovation centers to facilitate collaboration among organizations operating in the life sciences sector.
Implementation of the LSI - What We Can Expect
With the statutory framework of the LSI now in place, attention will turn to establishing the many procedures and standards required for its implementation. The Legislature has delegated the responsibility for developing these procedures to the LSC Board, whose task over the coming months will be to develop policies and regulations on a number of key issues, including:
- detailed requirements (beyond the general framework established in the LSI) for the certification of an applicant as a “certified life sciences company;”
- detailed rules establishing the application process for LSC support;
- the terms and conditions that will attach to any grants, loans, or other investments made by the MSLIF;
- regulations to implement the tax incentive programs (in coordination with the Department of Revenue);
- rules and guidelines governing revocation and recapture of support from companies who perform in a manner that is materially at variance with the representations made in their certification proposals;
- a code of ethics governing collaboration between business and the Commonwealth; and
- proposed legislation addressing exclusive licensing agreements for intellectual property developed by private institutions or businesses with the use of Commonwealth funds.
As the LSC Board and the Department of Revenue work to implement the LSI, it will be vitally important for the members of the life sciences community not only to understand the specifics of these policies as eventually promulgated, but also to contribute their own unique expertise to the development of such policies where such opportunities arise.