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AB-999 Income taxes: credit: small business investment.(2017-2018)

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Date Published: 03/29/2017 04:00 AM
AB999:v98#DOCUMENT

Amended  IN  Assembly  March 28, 2017

CALIFORNIA LEGISLATURE— 2017–2018 REGULAR SESSION

Assembly Bill No. 999


Introduced by Assembly Member Burke

February 16, 2017


An act to amend Section 23701 of add Section 18418 to, and to add and repeal Sections 17053.58 and 23658 of, the Revenue and Taxation Code, relating to taxation. taxation, and making an appropriation therefor, to take effect immediately, tax levy.


LEGISLATIVE COUNSEL'S DIGEST


AB 999, as amended, Burke. Corporation Tax Law: tax exempt organizations. Income taxes: credit: small business investment.
The Personal Income Tax Law and the Bank and Corporation Tax Law authorize various credits against the taxes imposed by those laws.
This bill, under both laws, would allow a credit for specified taxable years to qualified investors and qualified funds, as defined, in an amount equal to 25% of a qualified investment, as defined, in a qualified small business, as defined, but not to exceed, in the aggregate amount under both of those laws, $15,000,000 per year. The bill would authorize the Governor’s Office of Business and Economic Development to impose specified charges related to the administration of these credits and would deposit those amounts in the Small Business Investment Tax Credit Administration Account, an account created by this bill, and would, upon appropriation by the Legislature, use those moneys for costs associated with the administration of these credits.
This bill would require the Governor’s Office of Business and Economic Development to report annually by March 15 to the Legislature specified information regarding the tax credit. The bill would also require the Department of Finance to contract with a consultant to evaluate the effects of the tax credit on the California economy, as specified, and would appropriate $100,000 from the General Fund to the Department of Finance for this purpose.
This bill would take effect immediately as a tax levy.

The Corporation Tax Law exempts the income of various types of organizations from taxes imposed by that law except as provided. Existing law establishes a method by which an organization that has obtained a ruling or determination from the Internal Revenue Service that it is exempt from federal income taxes as an organization described in Section 501(c)(3), (c)(4), (c)(5), (c)(6), or (c)(7) of the Internal Revenue Code may obtain exemption from state taxes, as provided.

This bill would make nonsubstantive changes to this provision.

Vote: MAJORITY2/3   Appropriation: NOYES   Fiscal Committee: NOYES   Local Program: NO  

The people of the State of California do enact as follows:


SECTION 1.

 Section 17053.58 is added to the Revenue and Taxation Code, to read:

17053.58.
 (a) (1) For each taxable year beginning on or after January 1, 2018, and before January 1, 2023, there shall be allowed as a credit against the “net tax,” as defined in Section 17039, an amount equal to 25 percent of each qualified investment made by a qualified investor or a qualified fund during the taxable year in a qualified small business.
(2) A credit shall not be allowed under this section unless all of the following conditions are met:
(A) The Governor’s Office of Business and Economic Development certifies both of the following:
(i) The investment qualifies for the credit.
(ii) The total amount of credit allocated to the qualified investor or qualified fund.
(B) The small business applicant and the qualified investor or qualified fund provide satisfactory substantiation to, in the form and manner requested by, the Governor’s Office of Business and Economic Development that the investment is a qualified investment.
(3) The Governor’s Office of Business and Economic Development shall not certify an investment by a qualified investor or a qualified investment fund if, at the time the investment is proposed:
(A) The qualified investor or an investor in the qualified investment fund is an officer or principal of the qualified small business.
(B) The qualified investor or an investor in the qualified investment fund, either individually or in combination with one or more members of the investor’s family, owns, controls, or holds the power to vote 20 percent or more of the outstanding securities of the qualified small business, calculated pursuant to Sections 267(c) and 267 (e) of the Internal Revenue Code, relating to losses, expenses, and interest with respect to transactions between related taxpayers. A member of the family of an individual disqualified by this subparagraph shall not be eligible for a credit under this section. For taxpayers filing a joint return, the limitations in this subparagraph apply collectively to the investor and spouse.
(b) For purposes of this section:
(1) “Family” means a family member within the meaning of Section 267(c)(4) of the Internal Revenue Code.
(2) “Intern” means a student of an accredited institution of higher education, or a former student who has graduated in the past six months from an accredited institution of higher education, who is employed by a qualified small business in a nonpermanent position for a duration of nine months or less that provides training and experience in the primary business activity of the business.
(3) “Liquidation event” means a conversion of qualified investment for cash, other consideration, or any other form of equity or debt interest.
(4) “Minority group member” means a United States citizen who is African American, Hispanic American, Native American, or Asian Pacific American.
(5) “Minority-owned business” means a business for which one or more minority group members do both of the following:
(A) Own at least 50 percent of the business, or in the case of a publicly owned business, own at least 51 percent of the stock.
(B) Manage the business and control the daily business operations.
(6) “Officer” means a person elected or appointed by the board of directors to manage the daily operations of the qualified small business.
(7) “Pass-through entity” means a corporation that for the applicable taxable year is treated as an S corporation, a general partnership, limited partnership, limited liability partnership, trust, or limited liability company and which for the applicable taxable year is not taxed as a corporation.
(8) “Qualified fund” means a pooled angel investment network fund that is certified by the Governor’s Office of Business and Economic Development. Investments in the fund may consist of equity investments or notes that pay interest or other fixed amounts, or a combination of both.
(9) “Qualified high-technology field” includes aerospace, agricultural processing, renewable energy, energy efficiency and conservation, environmental engineering, food technology, cellulosic ethanol, information technology, materials science technology, nanotechnology, telecommunications, biotechnology, medical device products, pharmaceuticals, diagnostics, biologicals, chemistry, veterinary science, and similar fields.
(10) “Qualified investment” means a cash investment in a qualified small business that is made in exchange for common stock, a partnership or membership interest, preferred stock, debt with mandatory conversion to equity, or an equivalent ownership interest as determined by the Governor’s Office of Business and Economic Development. A “qualified investment” shall meet all of the following requirements:
(A) In a calendar year the investment is equal to or greater than ten thousand dollars ($10,000), if made by a qualified investor.
(B) In a calendar year the investment is equal to or greater than fifty thousand dollars ($50,000), if made by a qualified fund.
(C) The qualified small business has received certification for the calendar year in which the investment was made, prior to the date on which the investment was made, and the investment is made within 60 days of certification.
(D) The qualified small business does not issue securities that are traded on a public exchange within 180 days after the date on which the investment was made.
(E) The qualified small business does not have a liquidation event within 180 days after the date on which the investment was made.
(F) The qualified investor or the qualified fund that makes the investment shall have received certification for the calendar year prior to making the investment, except in the case of an investor who is not an accredited investor, within the meaning of Regulation D of the Securities and Exchange Commission, Section 230.501(a) of Title 17 of the Code of Federal Regulations, wherein the application for certification may be made within 30 days after making the investment.
(11) “Qualified investor” means an investor who is certified by the Governor’s Office of Business and Economic Development.
(12) “Qualified small business” means a business that is certified by the Governor’s Office of Business and Economic Development.
(13) “Principal” means a person having authority to act on behalf of the qualified small business.
(14) “Proprietary technology” means the technical innovations that are unique and legally owned or licensed by a business and includes, without limitation, those innovations that are patented, patent pending, a subject of trade secrets, or copyrighted.
(15) “Women” means persons of the female gender.
(16) “Women-owned business” means a business for which one or more women do both of the following:
(A) Own at least 50 percent of the business, or in the case of a publicly owned business, own at least 51 percent of the stock.
(B) Manage the business and control the daily business operations.
(c) A business may apply to the Governor’s Office of Business and Economic Development for certification as a qualified small business. To receive certification as a qualified small business, a business shall satisfy all of the following conditions:
(1) Submit an application in the form and manner specified by the Governor’s Office of Business and Economic Development, accompanied by an application fee of one hundred dollars ($100).
(2) Have its headquarters in California.
(3) Meet all of the following criteria:
(A) At least 51 percent of the business’s employees are employed in California.
(B) At least 51 percent of the business’s total payroll is paid or incurred in the state.
(C) At least 51 percent of the total value of all contractual agreements to which the business is a party in connection with its primary activity is for services performed under contract in California.
(4) Be engaged in, or be committed to engage in, innovation in California in one of the following as its primary business activity:
(A) Using proprietary technology to add value to a product, process, or service in a qualified high-technology field.
(B) Researching proprietary technology to add value to a product, process, or service in a qualified high-technology field.
(C) Researching or developing a proprietary product, process, or service in the fields of agriculture, tourism, forestry, mining, manufacturing, or transportation.
(D) Researching, developing, or producing a new proprietary technology for use in the fields of agriculture, tourism, forestry, mining, manufacturing, or transportation.
(5) Not be engaged in real estate development, insurance, lobbying, political consulting, wholesale or retail trade, leisure, ethanol production from corn, or professional services provided by attorneys, accountants, business consultants, physicians, or health care consultants.
(6) Have fewer than 125 employees.
(7) Pay its employees annual wages of at least 100 percent of the federal poverty guideline for the year for a family of four and pay its interns annual wages of at least 75 percent of the federal minimum wage used for federally covered employers, except that this requirement shall be reduced proportionally for employees and interns who work less than full time, and does not apply to an executive, officer, or member of the board of the business, or to any employee who owns, controls, or holds power to vote more than 20 percent of the outstanding securities of the business.
(8) Have (A) not been in operation for more than ten years, or (B) not been in operation for more than 20 years if the business is engaged in the research, development, or production of medical devices or pharmaceuticals for which United States Food and Drug Administration approval is required for use in the treatment or diagnosis of a disease or condition.
(9) Have not previously received private equity investments of more than four million dollars ($4,000,000).
(10) Have not issued securities that are traded on a public exchange.
(d) An investor may apply to the Governor’s Office of Business and Economic Development for certification as a qualified investor for a taxable year. To receive certification as a qualified investor, an investor shall satisfy all of the following conditions:
(1) Submit an application in the form and manner specified by the Governor’s Office of Business and Economic Development, accompanied by an application fee of three hundred fifty dollars ($350).
(2) Be a natural person.
(3) Certify to the Governor’s Office of Business and Economic Development that the investor will only invest in an approved manner.
(e) A pass-through entity may apply to the Governor’s Office of Business and Economic Development for certification as a qualified fund for a taxable year. To receive certification as a qualified fund, a fund shall satisfy all of the following conditions:
(1)  Submit an application in the form and manner specified by the Governor’s Office of Business and Economic Development, accompanied by an application fee of seven hundred fifty dollars ($750).
(2) Invest or intend to invest in a qualified small business.
(3) Be organized as a pass-through entity.
(4) Have at least three separate investors who are natural persons and certify to the Governor’s Office of Business and Economic Development that they will only invest in a manner which is approved.
(f) (1) A qualified investor or a qualified fund, or a qualified small business acting on behalf of a qualified investor or a qualified fund, shall notify the Governor’s Office of Business and Economic Development when an investment for which credits were allocated has been made, and the taxable year in which the investment was made.
(2) A qualified fund shall provide the Governor’s Office of Business and Economic Development with a statement indicating the amount invested by each investor in the qualified fund based on each investor’s share of the assets of the qualified fund at the time of the qualified investment.
(3) (A) By February 1 of each year each qualified small business that received an investment that qualified for a credit and each qualified investor and qualified fund that made an investment that qualified for a credit shall submit an annual report to the Governor’s Office of Business and Economic Development and pay a filing fee of one hundred dollars ($100), except as provided by paragraph (4). Each qualified investor and qualified fund must submit reports for three years following each year in which it made an investment that qualified for a credit, and each qualified small business shall submit reports for three years following the year in which it received an investment qualifying for a credit. Reports shall be made in the form required by the Governor’s Office of Business and Economic Development.
(B) A report submitted by a qualified small business pursuant to subparagraph (A) shall certify that the business satisfies the following requirements:
(i) The business has its headquarters in California.
(ii) At least 51 percent of the business’s employees are employed in California, and 51 percent of the business’s total payroll is paid or incurred in the state.
(iii) The business is engaged in, or is committed to engage in, innovation in California.
(iv) The business meets the payroll requirements.
(C) A report submitted by a qualified investor pursuant to subparagraph (A) shall certify that the investor remains invested in the qualified small business.
(D) A report submitted by a qualified fund pursuant to subparagraph (A) shall certify that the investor remains invested in the qualified small business.
(E) A qualified small business, qualified investor, or qualified fund that fails to file an annual report as required by this paragraph shall be subject to a fine of two hundred fifty dollars ($250).
(4) A qualified small business that ceases all operations and becomes insolvent shall file a final annual report in the form required by the Governor’s Office of Business and Economic Development documenting its insolvency. In the following years the business shall be exempt from the requirements of paragraph (3).
(g) The Governor’s Office of Business and Economic Development shall do all of the following:
(1) Deposit application fees and filing fees in the Small Business Investment Tax Credit Administration Account.
(2) Make available the applications for certifications for the 2018 calendar year on the agency’s Internet Web site by July 1, 2018, begin accepting applications by September 1, 2018, and make available the applications for certification for subsequent years on the agency’s Internet Web site by November 1 of the preceding year.
(3) Maintain a list of qualified small businesses certified under this section for the calendar year and make the list accessible to the public on the agency’s Internet Web site.
(4) (A) Within 30 days of receiving an application for certification under this section, either certify the applicant as satisfying the conditions required, request additional information from the applicant, or reject the application for certification.
(B) If the Governor’s Office of Business and Economic Development requests additional information from the applicant, it must either certify the applicant or reject the application within 30 days of receiving the additional information.
(C) If the Governor’s Office of Business and Economic Development neither certifies the applicant nor rejects the application within 30 days of receiving the original application or within 30 days of receiving the additional information requested, whichever is later, then the application is deemed rejected, and the Governor’s Office of Business and Economic Development shall refund the application fee.
(D) An applicant for certification under this section that is rejected may reapply.
(5) (A) Allocate tax credits to qualified investors or qualified funds in the order that the tax credit request applications are filed with the agency.
(B) Approve or reject tax credit request applications within 30 days of receiving the application.
(C) Treat all tax credit request applications filed with the agency on the same day as having been filed contemporaneously. If two or more qualified investors or qualified funds file tax credit request applications on the same day, and the aggregate amount of credit allocation claims exceeds the aggregate limit of credits under this section or the lesser amount of credits that remain unallocated on that day, then the credits must be allocated among the qualified investors or qualified funds who filed on that day on a pro rata basis with respect to the amounts claimed. The pro rata allocation for any one qualified investor or qualified fund is the product obtained by multiplying a fraction, the numerator of which is the amount of the credit allocation claim filed on behalf of a qualified investor or a qualified fund, and the denominator of which is the total of all credit allocations claims filed on behalf of all applicants on that day, by the amount of credits that remain unallocated on that day for the taxable year.
(6) After receiving notification that a qualified investment was made, issue credit certificates for the taxable year in which the investment was made to the qualified investor or, for an investment made by a fund, to each qualified investor who is an investor in the fund. The certificate must state that the credit is subject to revocation if the qualified investor or qualified fund does not hold the investment in the qualified small business for at least three years, consisting of the calendar year in which the investment was made and the two following years. The three-year holding period does not apply if any of the following apply:
(A) The investment by a qualified investor or qualified fund becomes worthless before the end of the three-year period.
(B) Eighty percent or more of the assets of the qualified small business is sold before the end of the three-year period.
(C) The qualified small business is sold before the end of the three-year period.
(D) The qualified small business’s common stock begins trading on a public exchange before the end of the three-year period.
(E) The qualified investor dies before the end of the three-year period.
(7) Notify the Department of Finance of the following:
(A) Every credit certificate issued under this section.
(B) Every credit revoked and subject to full or partial repayment under this section.
(8) By July 1, 2018, develop a plan to increase awareness of and use of the credit for investments in qualified California businesses and minority-owned and women-owned qualified small businesses with the goal that credits for investments be fully utilized.
(h) (1) The aggregate amount of qualified investments made by all taxpayers pursuant to this section and Section 23658 shall not exceed fifteen million dollars ($15,000,000) for each calendar year. However, if the aggregate amount of qualified investments made in any calendar year is less than fifteen million dollars ($15,000,000), the difference may be carried over to the next year, and any succeeding year during which this section remains in effect, and added to the aggregate amount authorized for those years.
(2) The total amount of qualified investments certified by the Governor’s Office of Business and Economic Development in any calendar year by any one qualified investor, including investments made directly by the investor and through a qualified fund, shall not exceed two hundred fifty thousand dollars ($250,000), unless the qualified investor is a taxpayer filing a joint return, in which case the total amount of qualified investments in any calendar year shall not exceed five hundred thousand dollars ($500,000).
(3) The total amount of qualified investments certified by the Governor’s Office of Business and Economic Development over all taxable years to any one qualified small business shall not exceed one million dollars ($1,000,000).
(i) (1) (A) If a qualified investment is not made within 60 days, there shall be added to the “net tax,” for the taxable year in which the certification occurred, the amount of the certified investment.
(B) A qualified investor or a qualified fund that fails to invest as specified in its application within 60 days of allocation of the credits shall notify the Governor’s Office of Business and Economic Development of the failure to invest within five business days of the expiration of the 60-day investment period.
(2) If the Governor’s Office of Business and Economic Development determines that a qualified investor or qualified fund did not meet the three-year holding period, there shall be added to the “net tax,” for the taxable year in which the requirement was not met, the entire amount of the credit previously allowed by this section.
(3) If the Governor’s Office of Business and Economic Development determines that a qualified small business did not meet the payroll or employment requirements in one or more of the five calendar years following the year in which an investment in the business that qualified for a tax credit under this section was made, there shall be added to the “net tax,” for the first taxable year in which either requirement was not met, the following percentage of the credit previously allowed under this section:
(A) One hundred percent if the first taxable year in which either requirement was not met was within the first year after the investment was made.
(B) Eighty percent if the first taxable year in which either requirement was not met was within the second year after the investment was made.
(C) Sixty percent if the first taxable year in which either requirement was not met was within the third year after the investment was made.
(D) Forty percent if the first taxable year in which either requirement was not met was within the fourth year after the investment was made.
(E) Twenty percent if the first taxable year in which either requirement was not met was within the fifth year after the investment was made.
(j) In the case where the credit allowed by this section exceeds the “net tax,” the excess may be carried over to reduce the “net tax” for the next four taxable years, or until the credit has been exhausted, whichever occurs first.
(k) Notwithstanding the California Public Records Act (Chapter 3.5 (commencing with Section 6250) of Division 7 of Title 1 of the Government Code) and the Information Practices Act of 1977 (Chapter 1 (commencing with Section 1798) of Title 1.8 of Part 4 of Division 3 of the Civil Code), the following information contained in an application submitted to the Governor’s Office of Business and Economic Development under this section shall be public:
(1) The name, mailing address, telephone number, email address, name of contact person, and industry type of a qualified small business upon certification.
(2) The name of a qualified investor upon certification.
(3) The name of a qualified fund upon certification.
(4) For credit certificates issued, the amount of the credit certificate issues, the amount of the qualifying investment, the name of the qualifying investor or qualifying fund that received the certificate, and the name of the qualifying small business in which the qualifying investment was made.
(5) For credits revoked pursuant to paragraph (2) of subdivision (i), the amount revoked and the name of the qualified investor or qualified fund.
(6) For credits revoked pursuant to paragraph (3) of subdivision (i), the amount revoked and the name of the qualified small business.
(l) Beginning January 1, 2019, the Governor’s Office of Business and Economic Development shall annually report by March 15 to the chairs and ranking minority members of the legislative committees having jurisdiction over taxes and economic development in the Senate and the Assembly on the tax credits issued under this section and Section 23658, in compliance with Section 9795 of the Government Code. The report shall include the following:
(1) The number and amount of the credits issued.
(2) The recipients of the credits.
(3) Each qualified small business, its location, line of business, and if it received an investment resulting in certification of tax credits.
(4) The total amount of investment in each qualified small business resulting in certification of tax credits.
(5) For each qualified small business that received investments resulting in tax credits, the total amount of additional investment that did not qualify for the tax credit.
(6) The number and amount of credits revoked under subdivision (i).
(7) The number and amount of credits that are no longer subject to the three-year holding period because of the exceptions.
(8) The plan to increase awareness of and use of the credit and the results achieved.
(9) Any other information relevant to evaluating the effect of the credits.
(m) (1) No later than December 31, 2019, the Department of Finance, after consultation with the Governor’s Office of Business and Economic Development, shall contract with a consultant to evaluate the effects of the small business investment tax credit allowed under this section and Section 23658 on the California economy. The consultant shall not be associated with, employed by, or have contracts with the entities involved in or associated with the venture capital, angel investment, life science, or technology industries. The program evaluation shall be completed by January 1, 2020, and shall be provided to the chairs and ranking minority members of the legislative committees having jurisdiction over taxes and economic development in the Senate and the Assembly, in compliance with Section 9795 of the Government Code. The program evaluation shall include, in addition to any other matters the Governor’s Office of Business and Economic Development considers relevant to evaluating the effectiveness of the credit, analysis of the following:
(A) The effect of the credit on the level of equity investment in qualified small businesses in California, including investments by angel investors, venture capital firms, and other sources of equity capital for startup businesses.
(B) The effect of the credit, if any, on investment in firms other than qualified small businesses.
(C) The amount of economic activity, including the number of jobs and the wages of those jobs, generated by qualified small businesses that received investments that qualified for the credit.
(D) The incremental change in California state and local taxes paid as a result of the allowance of the credit.
(E) The net benefit to the California economy of allowance of the credit relative to alternative uses of the resources, such as increasing the research and development credit or reducing the corporate franchise tax rate.
(2) One hundred thousand dollars ($100,000) is appropriated to the Department of Finance from the General Fund for the 2018–19 fiscal year for the purposes of this evaluation. Any unspent amount of this appropriation carries over to the 2019–20 fiscal year.
(3) To the extent necessary to complete the program evaluation, the consultant may request from the Department of Finance revenue tax return information of taxpayers who are qualified small businesses, qualified investors, and qualified funds. To the extent necessary to complete the program evaluation, the consultant may request from the Governor’s Office of Business and Economic Development employment and economic development applications for certification and annual reports made by qualified small businesses, qualified investors, and qualified funds. The consultant or consultants shall not disclose or release any data received under this section except as otherwise permitted by law.
(4) The Governor’s Office of Business and Economic Development shall provide the consultant for use in conducting the program evaluation the information contained in an application for certification received from a qualified small business, a qualified investor, or a qualified fund, and any annual reporting information received from a qualified small business, a qualified investor, or a qualified fund.
(5) The Department of Finance shall provide the consultant for use in conducting the program evaluation the information contained in any applicable tax returns of a qualified small business, qualified investor, or qualified fund.
(n) This section shall remain in effect only until January 1, 2027, and as of that date is repealed.

SEC. 2.

 Section 18418 is added to the Revenue and Taxation Code, to read:

18418.
 The Small Business Investment Tax Credit Account is hereby created in the General Fund. All moneys derived from the fees imposed by Sections 17053.58 and 23658 shall be deposited in the account and, upon appropriation by the Legislature to the Governor’s Office of Business and Economic Development, but used for administrative costs associated with certifying applicants, refunding application fees, and personnel and administrative expenses related to the credits allowed by Sections 17053.58 and 23658.

SEC. 3.

 Section 23658 is added to the Revenue and Taxation Code, to read:

23658.
 (a) (1) For each taxable year beginning on or after January 1, 2018, and before January 1, 2023, there shall be allowed as a credit against the “tax,” as defined in Section 23036, an amount equal to 25 percent of each qualified investment made by a qualified fund during the taxable year in a qualified small business.
(2) A credit shall not be allowed under this section unless all of the following conditions are met:
(A) The Governor’s Office of Business and Economic Development certifies both of the following:
(i) The investment qualifies for the credit.
(ii) The total amount of credit allocated to the qualified fund.
(B) The small business applicant and the qualified fund provide satisfactory substantiation to, in the form and manner requested by, the Governor’s Office of Business and Economic Development that the investment is a qualified investment.
(3) The Governor’s Office of Business and Economic Development shall not certify an investment by a qualified investment fund if, at the time the investment is proposed:
(A) An investor in the qualified investment fund is an officer or principal of the qualified small business.
(B) An investor in the qualified investment fund, either individually or in combination with one or more members of the investor’s family, owns, controls, or holds the power to vote 20 percent or more of the outstanding securities of the qualified small business, calculated pursuant to Sections 267(c) and 267 (e) of the Internal Revenue Code, relating to losses, expenses, and interest with respect to transactions between related taxpayers. A member of the family of an individual disqualified by this subparagraph shall not be eligible for a credit under this section. For taxpayers filing a joint return, the limitations in this subparagraph apply collectively to the investor and spouse.
(b) For purposes of this section:
(1) “Family” means a family member within the meaning of Section 267(c)(4) of the Internal Revenue Code.
(2) “Intern” means a student of an accredited institution of higher education, or a former student who has graduated in the past six months from an accredited institution of higher education, who is employed by a qualified small business in a nonpermanent position for a duration of nine months or less that provides training and experience in the primary business activity of the business.
(3) “Liquidation event” means a conversion of qualified investment for cash, other consideration, or any other form of equity or debt interest.
(4) “Minority group member” means a United States citizen who is African American, Hispanic American, Native American, or Asian Pacific American.
(5) “Minority-owned business” means a business for which one or more minority group members do both of the following:
(A) Own at least 50 percent of the business, or in the case of a publicly owned business, own at least 51 percent of the stock.
(B) Manage the business and control the daily business operations.
(6) “Officer” means a person elected or appointed by the board of directors to manage the daily operations of the qualified small business.
(7) “Pass-through entity” means a corporation that for the applicable taxable year is treated as an S corporation, a general partnership, limited partnership, limited liability partnership, trust, or limited liability company and which for the applicable taxable year is not taxed as a corporation.
(8) “Qualified fund” means a pooled angel investment network fund that is certified by the Governor’s Office of Business and Economic Development. Investments in the fund may consist of equity investments or notes that pay interest or other fixed amounts, or a combination of both.
(9) “Qualified high-technology field” includes aerospace, agricultural processing, renewable energy, energy efficiency and conservation, environmental engineering, food technology, cellulosic ethanol, information technology, materials science technology, nanotechnology, telecommunications, biotechnology, medical device products, pharmaceuticals, diagnostics, biologicals, chemistry, veterinary science, and similar fields.
(10) “Qualified investment” means a cash investment in a qualified small business that is made in exchange for common stock, a partnership or membership interest, preferred stock, debt with mandatory conversion to equity, or an equivalent ownership interest as determined by the Governor’s Office of Business and Economic Development. A “qualified investment” shall meet all of the following requirements:
(A) In a calendar year the investment is equal to or greater than fifty thousand dollars ($50,000), if made by a qualified fund.
(B) The qualified small business has received certification for the calendar year in which the investment was made, prior to the date on which the investment was made, and the investment is made within 60 days of certification.
(C) The qualified small business does not issue securities that are traded on a public exchange within 180 days after the date on which the investment was made.
(D) The qualified small business does not have a liquidation event within 180 days after the date on which the investment was made.
(E) The qualified fund that makes the investment shall have received certification for the calendar year prior to making the investment.
(11) “Qualified small business” means a business that is certified by the Governor’s Office of Business and Economic Development.
(12) “Principal” means a person having authority to act on behalf of the qualified small business.
(13) “Proprietary technology” means the technical innovations that are unique and legally owned or licensed by a business and includes, without limitation, those innovations that are patented, patent pending, a subject of trade secrets, or copyrighted.
(14) “Women” means persons of the female gender.
(15) “Women-owned business” means a business for which one or more women do both of the following:
(A) Own at least 50 percent of the business, or in the case of a publicly owned business, own at least 51 percent of the stock.
(B) Manage the business and control the daily business operations.
(c) A business may apply to the Governor’s Office of Business and Economic Development for certification as a qualified small business. To receive certification as a qualified small business, a business shall satisfy all of the following conditions:
(1) Submit an application in the form and manner specified by the Governor’s Office of Business and Economic Development, accompanied by an application fee of one hundred dollars ($100).
(2) Have its headquarters in California.
(3) Meet all of the following criteria:
(A) At least 51 percent of the business’s employees are employed in California.
(B) At least 51 percent of the business’s total payroll is paid or incurred in the state.
(C) At least 51 percent of the total value of all contractual agreements to which the business is a party in connection with its primary activity is for services performed under contract in California.
(4) Be engaged in, or be committed to engage in, innovation in California in one of the following as its primary business activity:
(A) Using proprietary technology to add value to a product, process, or service in a qualified high-technology field.
(B) Researching proprietary technology to add value to a product, process, or service in a qualified high-technology field.
(C) Researching or developing a proprietary product, process, or service in the fields of agriculture, tourism, forestry, mining, manufacturing, or transportation.
(D) Researching, developing, or producing a new proprietary technology for use in the fields of agriculture, tourism, forestry, mining, manufacturing, or transportation.
(5) Not be engaged in real estate development, insurance, lobbying, political consulting, wholesale or retail trade, leisure, ethanol production from corn, or professional services provided by attorneys, accountants, business consultants, physicians, or health care consultants.
(6) Have fewer than 125 employees.
(7) Pay its employees annual wages of at least 100 percent of the federal poverty guideline for the year for a family of four and pay its interns annual wages of at least 75 percent of the federal minimum wage used for federally covered employers, except that this requirement shall be reduced proportionally for employees and interns who work less than full time, and does not apply to an executive, officer, or member of the board of the business, or to any employee who owns, controls, or holds power to vote more than 20 percent of the outstanding securities of the business.
(8) Have (A) not been in operation for more than ten years, or (B) not been in operation for more than 20 years if the business is engaged in the research, development, or production of medical devices or pharmaceuticals for which United States Food and Drug Administration approval is required for use in the treatment or diagnosis of a disease or condition.
(9) Have not previously received private equity investments of more than four million dollars ($4,000,000).
(10) Have not issued securities that are traded on a public exchange.
(d) A pass-through entity may apply to the Governor’s Office of Business and Economic Development for certification as a qualified fund for a taxable year. To receive certification as a qualified fund, a fund shall satisfy all of the following conditions:
(1)  Submit an application in the form and manner specified by the Governor’s Office of Business and Economic Development, accompanied by an application fee of seven hundred fifty dollars ($750).
(2) Invest or intend to invest in a qualified small business.
(3) Be organized as a pass-through entity.
(4) Have at least three separate investors who are natural persons and certify to the Governor’s Office of Business and Economic Development that they will only invest in a manner which is approved.
(e) (1) A qualified fund, or a qualified small business acting on behalf of a qualified fund, shall notify the Governor’s Office of Business and Economic Development when an investment for which credits were allocated has been made, and the taxable year in which the investment was made.
(2) A qualified fund shall provide the Governor’s Office of Business and Economic Development with a statement indicating the amount invested by each investor in the qualified fund based on each investor’s share of the assets of the qualified fund at the time of the qualified investment.
(3) (A) By February 1 of each year each qualified small business that received an investment that qualified for a credit and each qualified fund that made an investment that qualified for a credit shall submit an annual report to the Governor’s Office of Business and Economic Development and pay a filing fee of one hundred dollars ($100), except as provided by paragraph (4). Each qualified fund must submit reports for three years following each year in which it made an investment that qualified for a credit, and each qualified small business shall submit reports for three years following the year in which it received an investment qualifying for a credit. Reports shall be made in the form required by the Governor’s Office of Business and Economic Development.
(B) A report submitted by a qualified small business pursuant to subparagraph (A) shall certify that the business satisfies the following requirements:
(i) The business has its headquarters in California.
(ii) At least 51 percent of the business’s employees are employed in California, and 51 percent of the business’s total payroll is paid or incurred in the state.
(iii) The business is engaged in, or is committed to engage in, innovation in California.
(iv) The business meets the payroll requirements.
(C) A report submitted by a qualified fund pursuant to subparagraph (A) shall certify that the investor remains invested in the qualified small business.
(D) A qualified small business or qualified fund that fails to file an annual report as required by this paragraph shall be subject to a fine of two hundred fifty dollars ($250).
(4) A qualified small business that ceases all operations and becomes insolvent shall file a final annual report in the form required by the Governor’s Office of Business and Economic Development documenting its insolvency. In the following years the business shall be exempt from the requirements of paragraph (3).
(f) The Governor’s Office of Business and Economic Development shall do all of the following:
(1) Deposit application fees and filing fees in the Small Business Investment Tax Credit Administration Account.
(2) Make available the applications for certifications for the 2018 calendar year on the agency’s Internet Web site by July 1, 2018, begin accepting applications by September 1, 2018, and make available the applications for certification for subsequent years on the agency’s Internet Web site by November 1 of the preceding year.
(3) Maintain a list of qualified small businesses certified under this section for the calendar year and make the list accessible to the public on the agency’s Internet Web site.
(4) (A) Within 30 days of receiving an application for certification under this section, either certify the applicant as satisfying the conditions required, request additional information from the applicant, or reject the application for certification.
(B) If the Governor’s Office of Business and Economic Development requests additional information from the applicant, it must either certify the applicant or reject the application within 30 days of receiving the additional information.
(C) If the Governor’s Office of Business and Economic Development neither certifies the applicant nor rejects the application within 30 days of receiving the original application or within 30 days of receiving the additional information requested, whichever is later, then the application is deemed rejected, and the Governor’s Office of Business and Economic Development shall refund the application fee.
(D) An applicant for certification under this section that is rejected may reapply.
(5) (A) Allocate tax credits to qualified funds in the order that the tax credit request applications are filed with the agency.
(B) Approve or reject tax credit request applications within 30 days of receiving the application.
(C) Treat all tax credit request applications filed with the agency on the same day as having been filed contemporaneously. If two or more qualified funds file tax credit request applications on the same day, and the aggregate amount of credit allocation claims exceeds the aggregate limit of credits under this section or the lesser amount of credits that remain unallocated on that day, then the credits must be allocated among the qualified funds who filed on that day on a pro rata basis with respect to the amounts claimed. The pro rata allocation for any one qualified fund is the product obtained by multiplying a fraction, the numerator of which is the amount of the credit allocation claim filed on behalf of a qualified fund, and the denominator of which is the total of all credit allocations claims filed on behalf of all applicants on that day, by the amount of credits that remain unallocated on that day for the taxable year.
(6) After receiving notification that a qualified investment was made, issue credit certificates for the taxable year in which the investment was made to each investor who is an investor in the fund. The certificate must state that the credit is subject to revocation if the qualified fund does not hold the investment in the qualified small business for at least three years, consisting of the calendar year in which the investment was made and the two following years. The three-year holding period does not apply if any of the following apply:
(A) The investment by a qualified fund becomes worthless before the end of the three-year period.
(B) Eighty percent or more of the assets of the qualified small business is sold before the end of the three-year period.
(C) The qualified small business is sold before the end of the three-year period.
(D) The qualified small business’s common stock begins trading on a public exchange before the end of the three-year period.
(7) Notify the Department of Finance of the following:
(A) Every credit certificate issued under this section.
(B) Every credit revoked and subject to full or partial repayment under this section.
(8) By July 1, 2018, develop a plan to increase awareness of and use of the credit for investments in qualified California businesses and minority-owned and women-owned qualified small businesses with the goal that credits for investments be fully utilized.
(g) (1) The aggregate amount of qualified investments made by all taxpayers pursuant to this section and Section 17053.58 shall not exceed fifteen million dollars ($15,000,000) for each calendar year. However, if the aggregate amount of qualified investments made in any calendar year is less than fifteen million dollars ($15,000,000), the difference may be carried over to the next year, and any succeeding year during which this section remains in effect, and added to the aggregate amount authorized for those years.
(2) The total amount of qualified investments certified by the Governor’s Office of Business and Economic Development over all taxable years to any one qualified small business shall not exceed one million dollars ($1,000,000).
(h) (1) (A) If a qualified investment is not made within 60 days, there shall be added to the “tax,” for the taxable year in which the certification occurred, the amount of the certified investment.
(B) A qualified fund that fails to invest as specified in its application within 60 days of allocation of the credits shall notify the Governor’s Office of Business and Economic Development of the failure to invest within five business days of the expiration of the 60-day investment period.
(2) If the Governor’s Office of Business and Economic Development determines that a qualified fund did not meet the three-year holding period, there shall be added to the “tax,” for the taxable year in which the requirement was not met, the entire amount of the credit previously allowed by this section.
(3) If the Governor’s Office of Business and Economic Development determines that a qualified small business did not meet the payroll or employment requirements in one or more of the five calendar years following the year in which an investment in the business that qualified for a tax credit under this section was made, there shall be added to the “tax,” for the first taxable year in which either requirement was not met, the following percentage of the credit previously allowed under this section:
(A) One hundred percent if the first taxable year in which either requirement was not met was within the first year after the investment was made.
(B) Eighty percent if the first taxable year in which either requirement was not met was within the second year after the investment was made.
(C) Sixty percent if the first taxable year in which either requirement was not met was within the third year after the investment was made.
(D) Forty percent if the first taxable year in which either requirement was not met was within the fourth year after the investment was made.
(E) Twenty percent if the first taxable year in which either requirement was not met was within the fifth year after the investment was made.
(i) In the case where the credit allowed by this section exceeds the “tax,” the excess may be carried over to reduce the “tax” for the next four taxable years, or until the credit has been exhausted, whichever occurs first.
(j) Notwithstanding the California Public Records Act (Chapter 3.5 (commencing with Section 6250) of Division 7 of Title 1 of the Government Code) and the Information Practices Act of 1977 (Chapter 1 (commencing with Section 1798) of Title 1.8 of Part 4 of Division 3 of the Civil Code), only the following information contained in an application submitted to the Governor’s Office of Business and Economic Development under this section shall be public:
(1) The name, mailing address, telephone number, email address, name of contact person, and industry type of a qualified small business upon certification.
(2) The name of a qualified fund upon certification.
(3) For credit certificates issued, the amount of the credit certificate issues, the amount of the qualifying investment, the name of the qualifying fund that received the certificate, and the name of the qualifying small business in which the qualifying investment was made.
(4) For credits revoked pursuant to paragraph (2) of subdivision (h), the amount revoked and the name of the qualified fund.
(5) For credits revoked pursuant to paragraph (3) of subdivision (h), the amount revoked and the name of the qualified small business.
(k) Beginning January 1, 2019, the Governor’s Office of Business and Economic Development shall annually report by March 15 to the chairs and ranking minority members of the legislative committees having jurisdiction over taxes and economic development in the Senate and the Assembly on the tax credits issued under this section and Section 17053.58, in compliance with Section 9795 of the Government Code. The report shall include the following:
(1) The number and amount of the credits issued.
(2) The recipients of the credits.
(3) Each qualified small business, its location, line of business, and if it received an investment resulting in certification of tax credits.
(4) The total amount of investment in each qualified small business resulting in certification of tax credits.
(5) For each qualified small business that received investments resulting in tax credits, the total amount of additional investment that did not qualify for the tax credit.
(6) The number and amount of credits revoked under subdivision (h).
(7) The number and amount of credits that are no longer subject to the three-year holding period because of the exceptions.
(8) The plan to increase awareness of and use of the credit and the results achieved.
(9) Any other information relevant to evaluating the effect of the credits.
(l) This section shall remain in effect only until January 1, 2027, and as of that date is repealed.

SEC. 4.

 It is the intent of the Legislature to comply with Section 41 of the Revenue and Taxation Code.

SEC. 5.

 This act provides for a tax levy within the meaning of Article IV of the California Constitution and shall go into immediate effect.
SECTION 1.Section 23701 of the Revenue and Taxation Code is amended to read:
23701.

(a)Organizations that are organized and operated for nonprofit purposes within the provisions of a specific section of this article, or are defined in Section 23701h, relating to certain title-holding companies, or Section 23701x, relating to certain title-holding companies, are exempt from taxes imposed under this part, except as provided in this article or in Article 2 (commencing with Section 23731) of this chapter, if all of the following occur:

(1)An application for exemption is submitted in the form prescribed by the Franchise Tax Board.

(2)A filing fee of twenty-five dollars ($25) is paid with each application for exemption filed with the Franchise Tax Board after December 31, 1969.

(3)The Franchise Tax Board issues a determination exempting the organization from tax.

(b)(1)Notwithstanding subdivision (a), an organization organized and operated for nonprofit purposes in accordance with Section 23701a, 23701d, 23701e, 23701f, or 23701g shall be exempt from taxes imposed by this part, except as provided in this article or in Article 2 (commencing with Section 23731), upon its submission to the Franchise Tax Board of one of the following:

(A)A copy of the determination letter or ruling issued by the Internal Revenue Service recognizing the organization’s exemption from federal income tax under Section 501(a) of the Internal Revenue Code, as an organization described in Section 501(c)(3), (c)(4), (c)(5), (c)(6), or (c)(7) of the Internal Revenue Code.

(B)A copy of the group exemption letter issued by the Internal Revenue Service that states that both the central organization and all of its subordinates are tax-exempt under Section 501(c)(3), (c)(4), (c)(5), (c)(6), or (c)(7) of the Internal Revenue Code and substantiation that the organization is included in the federal group exemption letter as a subordinate organization.

(2)(A)Upon receipt of the documents required in subparagraph (A) or (B) of paragraph (1), the Franchise Tax Board shall issue an acknowledgment that the organization is exempt from taxes imposed by this part, except as provided in this article or in Article 2 (commencing with Section 23731). The acknowledgment may refer to the organization’s recognition by the Internal Revenue Service of exemption from federal income tax as an organization described in Section 501(c)(3), (c)(4), (c)(5), (c)(6), or (c)(7) of the Internal Revenue Code and, if applicable, the organization’s subordinate organization status under a federal group exemption letter. The effective date of an organization’s exemption from state income tax pursuant to this subdivision shall be no later than the effective date of the organization’s recognition of exemption from federal income tax as an organization described in Section 501(c)(3), (c)(4), (c)(5), (c)(6), or (c)(7) of the Internal Revenue Code, or its status as a subordinate organization under a federal group exemption letter, as applicable.

(B)Notwithstanding any other provision of this subdivision, an organization formed as a California corporation or qualified to do business in California that, as of the date of receipt by the Franchise Tax Board of the documents required under paragraph (1), is listed by the Secretary of the State or Franchise Tax Board as “suspended” or “forfeited” may not establish its exemption under paragraph (1) and shall not receive an acknowledgment referred to under subparagraph (A) from the Franchise Tax Board until that corporation is listed by the Secretary of State and the Franchise Tax Board as an “active” corporation.

(3)If, for federal income tax purposes, an organization’s exemption from tax as an organization described in Section 501(c)(3), (c)(4), (c)(5), (c)(6), or (c)(7) of the Internal Revenue Code is suspended or revoked, the organization shall notify the Franchise Tax Board of the suspension or revocation, in the form and manner prescribed by the Franchise Tax Board. Upon notification, the board shall suspend or revoke, whichever is applicable, for state income tax purposes, the organization’s exemption under paragraph (1).

(4)This subdivision shall not be construed to prevent the Franchise Tax Board from revoking the exemption of an organization that is not organized or operated in accordance with California law, this chapter, or Section 501(c)(3), (c)(4), (c)(5), (c)(6), or (c)(7) of the Internal Revenue Code.

(5)If the Franchise Tax Board suspends or revokes the exemption of an organization pursuant to paragraph (3) or (4), the exemption shall be reinstated only upon compliance with this section, regardless of whether the organization can establish exemption under paragraph (1).

(c)This section shall not prevent a determination from having retroactive effect and does not prevent the issuance of a determination with respect to a domestic organization which was in existence prior to January 1, 1970, and exempt under prior law without the submission of a formal application or payment of a filing fee. For the purpose of this section, the term “domestic” means created or organized under the laws of this state.

(d)The Franchise Tax Board may prescribe rules and regulations to implement the provisions of this article.