Tax break would reward patent producers: Indiana legislators view bill as way to attract young, innovative high-tech companies and solo entrepreneurs

A bill weaving its way through the Indiana General Assembly could give the state an edge in attracting and growing the type of high-tech ventures several states covet.

Indiana House Bill 1461, introduced by Rep. Brian Bosma, R-Indianapolis, advanced to the Senate after sailing through the House of Representatives on Feb. 26 by a vote of 95-3.

The legislation that was referred to the Senate’s Economic Development and Technology Committee would provide a tax incentive that would shield income from patents up to $5 million annually for 10 years. Companies with fewer than 500 employees would be eligible.

Part of what makes the bill so attractive to the technology community is that it exempts 100 percent of the income for the first five years, said Mark Shublak, a lobbyist and partner at Indianapolis-based law firm Ice Miller LLP. The amount would decrease in increments the final five years.

Sole entrepreneurs could save $170,000 yearly, and corporations $425,000.

“We regard this bill as the gem of the technology incentives for this legislative agenda,” he said. “We’re very hopeful it will be embraced.”

The idea for the tax break sprang out of a summer forum hosted by TechPoint, a trade association for Indiana high-tech companies, in which members formulated their wish list for the upcoming session.

Ireland adopted a similar measure that has led corporations such as Texas-based Dell Inc. and Seattle-based Microsoft Corp. to locate some research and development activities there, Shublak said.

If lawmakers pass the bill, Indiana will become the first state in the nation to offer a tax break on patent income. Supporters say the aim is to become the most patentfriendly state, much like Connecticut is to insurance or Delaware is to business incorporation.

“To me, the important point is that it’s an interesting way to try to differentiate Indiana as a receptive place for intellectual property-driven businesses to grow,” said David Johnson, CEO of the BioCrossroads life sciences initiative.

Most startups with a technology slant don’t own property and have little payroll, making them ineligible for other state tax incentives. Their investments instead are mainly tied to clinical trials that could produce breakthrough discoveries and subsequent patents.

The tax exemption on $5 million of annual income would have rivaled the amount available from the popular EDGE tax credit before legislators doubled it to $10 million last session. Since 1994, Indiana has used the Economic Development for a Growing Economy credit to spur private-sector job growth. Over the last 12 years, Indiana has authorized $667 million in credits for 241 projects.

Whether HB 1461 would have the same impact remains uncertain. But it could help entrepreneurs balance priorities, said Paul Hunt, a partner at Indianapolis-based Barnes & Thornburg LLP who practices intellectual property law.

“There is always a constant struggle to juggle between, ‘Do we spend money on advertising and marketing, or do we spend money on intellectual property?'” he said. “That’s a constant theme we hear all the time. Hopefully, this will make it easier for companies to do both.”

One of the concerns prompting the bill is that the number of patents filed in Indiana has dipped from 1,745 in 2002 to 1,246 in 2005, according to the U.S. Patent and Trademark Office. The figures would even be lower, Bosma said, “if you take a central Indiana pharmaceutical company out of the mix,” referring to Eli Lilly and Co.

Given that 75 percent of the new jobs in Indiana during the next decade will be created by small businesses that employ fewer than 150 workers, the goal of the bill is to nurture the next generation of employers as much as possible.

“It should be the key goal of government,” Bosma said, “to create an environment for entrepreneurship and job creation to thrive.”

In that regard, the tax incentive could be especially attractive to startups attempting to patent intellectual property generated from university research, said Joe Hornett, chief operating officer of Purdue Research Foundation. Purdue Research Park and the Indiana University Emerging Technologies Center are two of the programs that incubate young companies spawned from the research.

The money the firms save on taxes in turn can be plowed back into the company to further develop the intellectual property, Hornett said.

The legislation now is under the control of David Ford, R-Hartford City, who chairs the Senate Economic Development and Technology Committee. Supporters are optimistic the measure will pass, given the incentive is receiving a fair amount of attention from both parties.

Three similar pieces of legislation were introduced, including one by Ford that capped exemptions from patent income at $1 million. Another, filed by Rep. Terri Austin, D-Anderson, included the $5 million figure contained in Bosma’s proposal, but limited the tax break to five years.

Supporters in the end agreed the legislation that would be trumpeted needed to be lucrative enough to pay potential dividends.