Reference Title: corporate income tax rate reduction

AN ACT
AMENDING SECTION 31-253, ARIZONA REVISED STATUTES; REPEALING SECTION 41-1675, ARIZONA REVISED STATUTES; AMENDING SECTIONS 43-1111, 43-1121, 43-1130, 43-1130.01 AND 43-1164, ARIZONA REVISED STATUTES; REPEALING SECTIONS 43-1162 THROUGH 43-1166, 43-1171 AND 43-1172, ARIZONA REVISED STATUTES; RELATING TO CORPORATE INCOME TAX RATES.

Be it enacted by the Legislature of the State of Arizona:

Section 1. Section 31-253, Arizona Revised Statutes, is amended to read:

31-253 . Use of prisoners in prison construction; definition

A. The director of the state department of corrections and the director of the department of administration shall use prisoner labor to the maximum extent feasible in the construction of all prison facilities.

B. Prisoner labor shall be used exclusively for all fencing and concrete flatwork as well as in the construction, renovation, conversion and maintenance of all of the following types of buildings:

1. Administrative.

2. Warehouse.

3. Vehicle and maintenance.

4. Educational and vocational.

5. Arizona correctional industries.

6. Multipurpose.

7. Laundry.

C. Subsection B of this section does not apply if any of the following conditions apply:

1. The director of the state department of corrections, after consultation with the department of administration, determines that use of prisoner labor is not feasible because highly technical skills are needed in the construction and this need cannot be met by prisoner labor.

2. The director determines that the use of prisoner labor is not feasible due to considerations of public or institutional security.

3. The director declares, and the governor certifies, that there is a shortage of beds available for inmates which requires the emergency construction of new beds.

D. Before the publication of the notice inviting sealed bids for any prison construction, the director of the department of administration shall review the listing of work crews maintained by the director of the state department of corrections pursuant to section 31-251, subsection B, paragraph 4. If a work crew exists or can be assembled that possesses the skills to fulfill the requirements of all or any part of the proposed construction contract, the bid for that portion of the proposed construction which can be accomplished by prisoner labor shall not be published and that portion of the proposed construction shall be performed by inmate work crews under the project supervision of the director of the state department of corrections or the director of the department of administration, or both. That portion of the proposed construction contract that cannot be performed entirely by prisoner labor may be let for bid. An estimate of the approximate number of available prisoners with skill levels appropriate for the construction project shall be contained within the contract documents, and notice of the requirement to make maximum feasible use of prisoner labor shall be published with the notice inviting sealed bids.

E. Contractors may employ prisoners in a prison construction project. A contractor who employs prisoners is entitled to a tax credit under the provisions of section 43-1162 in an amount equivalent to that stated in section 43-1162, subsection B, paragraph 1, subdivision (b). The compensation paid by contractors to prisoners employed in prison construction is subject to the provisions of section 41-1674.

F. In this section, "prison construction" means any construction or major maintenance, renovation or conversion of any prison facility.

Sec. 2. Repeal

Section 41-1675 , Arizona Revised Statutes, is repealed.

Sec. 3. Section 43-1111, Arizona Revised Statutes, is amended to read:

43-1111 . Tax rates for corporations

There shall be levied, collected and paid for each taxable year upon the entire Arizona taxable income of every corporation, unless exempt under section 43-1126 or 43-1201 or as otherwise provided in this title or by law, taxes in an amount of eight 7.968 per cent of net income or fifty dollars, whichever is greater.

Sec. 4. Section 43-1121, Arizona Revised Statutes, is amended to read:

43-1121 . Additions to Arizona gross income; corporations

In computing Arizona taxable income for a corporation, the following amounts shall be added to Arizona gross income:

1. The amounts computed pursuant to section 43-1021, paragraphs 4 through 10 and 14.

2. The amount of dividend income received from corporations and allowed as a deduction pursuant to sections 243, 244 and 245 of the internal revenue code.

3. Taxes which are based on income paid to states, local governments or foreign governments and which were deducted in computing federal taxable income.

4. Expenses and interest relating to tax-exempt income on indebtedness incurred or continued to purchase or carry obligations the interest on which is wholly exempt from the tax imposed by this title. Financial institutions, as defined in section 6-101, shall be governed by section 43-961, paragraph 2.

5. Commissions, rentals and other amounts paid or accrued to a domestic international sales corporation controlled by the payor corporation if the domestic international sales corporation is not required to report its taxable income to this state because its income is not derived from or attributable to sources within this state. If the domestic international sales corporation is subject to article 4 of this chapter, the department shall prescribe by rule the method of determining the portion of the commissions, rentals and other amounts which are paid or accrued to the controlled domestic international sales corporation and which shall be deducted by the payor. "Control" for purposes of this paragraph means direct or indirect ownership or control of fifty per cent or more of the voting stock of the domestic international sales corporation by the payor corporation.

6. Federal income tax refunds received during the taxable year to the extent they were deducted in arriving at Arizona taxable income in a previous year.

7. The amount of net operating loss taken pursuant to section 172 of the internal revenue code.

8. The amount of exploration expenses determined pursuant to section 617 of the internal revenue code to the extent that they exceed seventy-five thousand dollars and to the extent that the election is made to defer those expenses not in excess of seventy-five thousand dollars.

9. Amortization of costs incurred to install pollution control devices and deducted pursuant to the internal revenue code or the amount of deduction for depreciation taken pursuant to the internal revenue code on pollution control devices for which an election is made pursuant to section 43-1129.

10. The amount of depreciation or amortization of costs of child care facilities deducted pursuant to section 167 or 188 of the internal revenue code for which an election is made to amortize pursuant to section 43-1130 or for which a credit is taken under section 43-1163, subsection A, paragraph 1 .

11. Arizona state income tax refunds received, to the extent the amount of the refunds is not already included in Arizona gross income, if a tax benefit was derived by deduction of this amount in a prior year.

12. The amount of depreciation or amortization of costs of recycling equipment deducted pursuant to the internal revenue code for which an election is made pursuant to section 43-1164.

13. 12. The amount paid as taxes on property in this state by a qualified defense contractor with respect to which a credit is claimed under section 43-1166.

14. 13. The loss of an insurance company that is exempt under section 43-1201 to the extent that it is included in computing Arizona gross income on a consolidated return pursuant to section 43-947.

15. Any amount of agricultural water conservation expenses that were deducted pursuant to the internal revenue code for which a credit is claimed under section 43-1172.

16. 14. The amount by which the depreciation or amortization computed under the internal revenue code with respect to property for which a credit was taken under section 43-1169 exceeds the amount of depreciation or amortization computed pursuant to the internal revenue code on the Arizona adjusted basis of the property.

17. 15. The amount by which the adjusted basis computed under the internal revenue code with respect to property for which a credit was claimed under section 43-1169 and which is sold or otherwise disposed of during the taxable year exceeds the adjusted basis of the property computed under section 43-1169.

18. 16. The amount by which the depreciation or amortization computed under the internal revenue code with respect to property for which a credit was taken under section 43-1170 exceeds the amount of depreciation or amortization computed pursuant to the internal revenue code on the Arizona adjusted basis of the property.

19. 17. The amount by which the adjusted basis computed under the internal revenue code with respect to property for which a credit was claimed under section 43-1170 and which is sold or otherwise disposed of during the taxable year exceeds the adjusted basis of the property computed under section 43-1170.

20. 18. The deduction referred to in section 1341(a)(4) of the internal revenue code for restoration of a substantial amount held under a claim of right.

21. 19. The amount by which a capital loss carryover allowable pursuant to section 1341(b)(5) of the internal revenue code exceeds the capital loss carryover allowable pursuant to section 43-1130.01, subsection F.

22. 20. Any amount deducted in computing Arizona taxable income as expenses for installing solar stub outs or electric vehicle recharge outlets in this state with respect to which a credit is claimed pursuant to section 43-1176.

23. 21. Any wage expenses deducted pursuant to the internal revenue code for which a credit is claimed under section 43-1175 and representing net increases in qualified employment positions for employment of temporary assistance for needy families recipients.

24. 22. Any amount of expenses that were deducted pursuant to the internal revenue code and for which a credit is claimed under section 43-1178.

25. 23. Any amount deducted pursuant to section 170 of the internal revenue code representing the contribution of a motor vehicle for which a credit is claimed pursuant to section 43-1177.

Sec. 5. Section 43-1130, Arizona Revised Statutes, is amended to read:

43-1130 . Amortization of the cost of child care facilities

A. At the election of any corporate taxpayer operating a child care facility for the purpose of making profit, any expenditure made to purchase, construct, renovate or remodel child care facilities or equipment shall be allowable as a subtraction ratably over a period of sixty months, beginning with the month in which the property is placed in service.

B. At the election of a taxpayer operating a child care facility within this state primarily for the children of employees of the taxpayer, any expenditure made to acquire, construct, renovate or remodel the child care facility or equipment is allowable as a subtraction ratably over a period of twenty-four months beginning with the month in which the property is placed in service.

C. The subtraction provided by this section shall be in lieu of :

1. any allowance for the exhaustion, wear and tear of such property used in a trade or business or of property held for the production of income, including a reasonable allowance for obsolescence pursuant to section 167 or 188 of the internal revenue code.

2. A credit for the cost of day care facilities under section 43-1163, subsection A, paragraph 1.

D. In the case of a partnership, joint venture or other pooled investment or joint ownership of child care property each participating corporate owner may claim the pro rata share of the subtraction based on the corporate ownership interest in the property. The total of the subtractions allowed all such owners of the property shall not exceed the amount that would have been allowed for a sole owner of the property.

Sec. 6. Section 43-1130.01, Arizona Revised Statutes, is amended to read:

43-1130.01 . Restoration of a substantial amount held under claim of right; computation of tax

A. This section applies if:

1. An item of income was included in gross income for a prior taxable year or years because it appeared that the taxpayer had an unrestricted right to the item.

2. A deduction would be allowable under the internal revenue code or this title for the taxable year, without application of section 1341(b)(3) of the internal revenue code or section 43-1121, paragraph 20 18 , because after the close of the prior taxable year or years it was established that the taxpayer did not have an unrestricted right to all or part of the item.

3. The amount of the deduction exceeds three thousand dollars.

B. If all of the conditions in subsection A of this section apply, the tax imposed by this chapter for the taxable year is an amount equal to the tax for the taxable year computed without the deduction, minus the decrease in tax under this chapter for the prior taxable year or years that would result solely from excluding the item or portion of the item from gross income for the prior taxable year or years.

C. If the decrease in tax exceeds the tax imposed by this chapter for the taxable year, computed without the deduction, the excess is considered to be a payment of tax on the last day prescribed by law for the payment of tax for the taxable year and shall be refunded or credited in the same manner as if it were an overpayment for the taxable year.

D. Subsection B of this section does not apply to any deduction that is allowable with respect to an item that was included in gross income by reason of the sale or other disposition of stock in trade of the taxpayer, or other property of a kind that would properly have been included in the inventory of the taxpayer on hand at the close of the prior taxable year, or property that is held by the taxpayer primarily for sale to customers in the ordinary course of the taxpayer's trade or business. This subsection does not apply if the deduction arises out of refunds or repayments with respect to rates made by a regulated public utility that is listed in section 7701(a)(33)(A) through (H) of the internal revenue code, if the refunds or repayments are:

1. Required to be made by the government, political subdivision, agency or instrumentality referred to in that section.

2. Required to be made by an order of a court.

3. Made in settlement of litigation or under threat or imminence of litigation.

E. If the exclusion under subsection B of this section results in:

1. A net operating loss for the prior taxable year or years for purposes of computing the decrease in tax for the prior year or years under subsection B of this section:

(a) The loss shall be carried over under this chapter to the same extent and in the same manner as provided under section 43-1123, and under prior law.

(b) No carryover beyond the taxable year may be taken into account.

2. A capital loss for the prior taxable year or years, for purposes of computing the decrease in tax for the prior taxable year or years under subsection B of this section:

(a) The loss shall be:

(i) Carried over under this chapter to the same extent and in the same manner as was provided under prior law for taxable years beginning on or before December 31, 1987.

(ii) Carried back and carried over to the same extent and in the same manner as provided under section 1212 of the internal revenue code for taxable years beginning from and after December 31, 1987.

(b) No carryover beyond the taxable year may be taken into account.

F. In computing Arizona taxable income for taxable years subsequent to the current taxable year, the net operating loss or capital loss determined in subsection E of this section shall be taken into account to the same extent and in the same manner as a net operating loss or capital loss sustained for prior taxable years.

Sec. 7. Section 43-1169, Arizona Revised Statutes, is amended to read:

43-1169 . Credit for construction costs of qualified environmental technology facility

A. A credit is allowed against the taxes imposed by this title for expenses incurred in constructing a qualified environmental technology manufacturing, producing or processing facility as described in section 41-1514.02. The amount of the credit is equal to ten per cent of the amount spent during the taxable year to construct the facility, including land acquisition, improvements, building improvements, machinery and equipment, but not exceeding seventy-five per cent of the tax liability under this title for the taxable year determined without applying the credit.

B. Amounts qualifying for the credit under this section must be includible in the taxpayer's adjusted basis for the facility. The adjusted basis of any asset with respect to which the taxpayer has claimed a credit shall be reduced by the amount of credit claimed with respect to that asset. This credit does not affect the deductibility for depreciation or amortization of the remaining adjusted basis of the asset.

C. A credit allowed under this section is in lieu of a credit under section 43-1164 with respect to the same recycling equipment.

D. C. A taxpayer may claim a credit under this section with respect to new qualifying construction within ten years after the start of the facility's initial construction, but a credit is not allowed under this section for any amount spent more than ten years after the start of the facility's initial construction.

E. D. A taxpayer qualifies for the credit under this section if the taxpayer owns the facility or leases the facility or any component of the facility for a term of five or more years.

F. E. If the allowable tax credit exceeds seventy-five per cent of the taxes otherwise due under this title on the claimant's income, or if there are no taxes due under this title, the amount of the claim not used to offset taxes under this title may be carried forward for not more than fifteen taxable years as a credit against subsequent years' income tax liability.

G. F. Co-owners of a business, including partners in a partnership, may each claim only the pro rata share of the credit allowed under this section based on the ownership interest. The total of the credits allowed all such owners may not exceed the amount that would have been allowed for a sole owner of the business.

H. G. If either of the following circumstances occurs with respect to a qualified environmental technology manufacturing, producing or processing facility, the tax imposed by this title for the taxable year in which the circumstance occurs shall be increased by the full amount of all credits previously allowed under this section with respect to that facility:

1. The taxpayer abandons construction before the facility is placed in service.

2. Before the facility is placed in service, the taxpayer changes plans in such a manner as to no longer qualify as an environmental technology manufacturing, producing or processing facility under section 41-1514.02.

I. H. If, within five years after being placed in service, an operating environmental technology manufacturing, producing or processing facility with respect to which a credit has been allowed under this section ceases for any reason to operate as an environmental technology manufacturing, producing or processing facility as described in section 41-1514.02, the tax imposed by this title for the taxable year shall be increased by an amount determined by multiplying the full amount of all credits previously allowed under this section with respect to that facility by a percentage determined as follows:

1. If the facility was placed in service less than one year before ceasing to operate as an environmental technology manufacturing, producing or processing facility, one hundred per cent.

2. If the facility was placed in service at least one year but not more than two years before ceasing to operate as an environmental technology manufacturing, producing or processing facility, eighty per cent.

3. If the facility was placed in service at least two years but less than three years before ceasing to operate as an environmental technology manufacturing, producing or processing facility, sixty per cent.

4. If the facility was placed in service at least three years but less than four years before ceasing to operate as an environmental technology manufacturing, producing or processing facility, forty per cent.

5. If the facility was placed in service at least four years but less than five years before ceasing to operate as an environmental technology manufacturing, producing or processing facility, twenty per cent.

J. I. The department by rule shall prescribe record keeping requirements for taxpayers who claim a credit under this section.

Sec. 8. Repeal

Sections 43-1162 through 43-1164, 43-1171 and 43-1172, Arizona Revised Statutes, are repealed.

Sec. 9. Savings

Notwithstanding section 8 of this act, any taxpayer who has acquired carry forward as a result of any credit that is repealed by section 8 of this act is allowed to apply that carry forward, consistent with the terms of the repealed credit, for tax years on or before December 31, 2005.

Sec. 10. Effective date

Sections 3 and 8 of this act are effective and apply to taxable years beginning from and after December 31, 1999.

APPROVED BY THE GOVERNOR MAY 19, 1999.

FILED IN THE OFFICE OF THE SECRETARY OF STATE MAY 19, 1999.