It shouldn’t be this hard to make simple policy adjustments to cope with the intangible economy. But it is. Case in point is the Qualified Small Issue Manufacturing Bonds program (formerly known as Industrial Development Bonds – IDBs). As I have noted in a number of earlier postings, only traditional factories are eligible for low cost financing under this program. The 2009 stimulus bill included a minor change to allow the use of these bonds to finance facilities manufacturing intangible property. The change allowed local government to support new facilities for software development or bio-tech research facilities, for example, as well. But that provision expired at the end of 2010 and was not included in any tax extenders legislation. This simply act of putting physical and intangible investments on the same footing was forgotten and ignored.
Now comes the latest attempt to rectify the situation (see early posting for the last time). Just before the July 4 recess, Representatives Randy Hultgren (R-IL) and Richard Neal (D-MA) (re) introduced the Modernizing American Manufacturing Bonds Act – H.R. 2890.
The Council of Development Finance Agencies (CDFA) describes the issue thus:
Qualified Small Issue Manufacturing Bonds are the bedrock financing tool for small- to mid-sized manufacturers. This financing tool has been providing affordable capital to our nation’s most important industry for over three decades. Current federal law defines a “manufacturing facility” as one that produces tangible property. However, manufacturing processes, production, and technology have changed significantly since this definition was established. Today’s manufacturers encompass more modern, high-tech, and intangible manufacturing practices such as bio-technology, energy generation, food processing, software, design and formula development, and intellectual property. In relationship to Qualified Small Issue Manufacturing Bonds (commonly known as Industrial Development Bonds or IDBs), the current definition as outlined in the tax code reflects an old philosophy and outdated approach to manufacturing. This outdated definition of manufacturing has resulted in the increasingly limited use of this job-generating economic development tool.
CDFA proposes updating the definition of manufacturing as it relates to Qualified Small Issue Manufacturing Bonds to allow for companies who produce both tangible and intangible property to access the capital markets. The measure would broaden the definition to include facilities that manufacture, create, or produce intangible property. The expanded definition would be sufficiently broad to cover software, patents, copyrights, formulas, processes, designs, patterns, know-how, format, and similar intellectual property. Under this new definition, knowledge-based businesses could access low-cost, tax-exempt IDB financing. This updated definition would align the growing high-tech manufacturing sector with the tools necessary to finance industry growth and expansion. This change will make an immediate difference throughout the country to help retain and create jobs, spur manufacturing investment, and accelerate the nation’s economy.
By the way, the change is actually very simple as it builds on the existing definition in the tax code of intangibles. The specific addition to the definition of a “manufacturing facility” is one which “is used in the creation or production of intangible property which is described in section 197(d)(1)(C)(iii)”. That line in the Internal Revenue Code of 1986 refers to a very specific subset of intangibles as “any patent, copyright, formula, process, design, pattern, knowhow, format, or other similar item”. Thus the expanded program applied to only a narrow part of what we would consider intangibles. [Note that the term “section 197 intangible” for purposes of amortized tax deductions is much broader.]
Give that this is a simple fix, maybe this time something will get done?