The R&D Tax Aspects of Tennessee Innovation



By , , and


Tennessee-Innovation
        The Tennessee economy is a robust one.  The state is home to eight Fortune 500 company headquarters and a diverse range of economic sectors.  The automotive industry is spearheading economic growth while a broad array of other innovative sectors pushes forward.  Common to them all is a focus on innovation.  Federal and state R&D tax credits are available to stimulate these efforts.


The Research & Development Tax Credit

        Enacted in 1981, the federal Research and Development (R&D) Tax Credit allows a credit of up to 13% of eligible spending for new and improved products and processes. Qualified research must meet the following four criteria:

  • New or improved products, processes, or software
  • Technological in nature
  • Elimination of Uncertainty
  • Process of Elimination

        Eligible costs include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent.  On December 18, 2014 President Obama signed the bill extending the R&D Tax Credit for the 2014 tax years.


Automotive

        The automotive sector is crucial to the local Tennessee economy.  Automotive related production accounts for one in three Tennessee manufacturing jobs, employing over 100,000 people.  Business Facilities Magazine named Tennessee the top state in its Automotive Manufacturing Strength ranking for 2012, the third straight year that recognition has gone to the state.  The Tennessee Automotive Manufacturers Association reports the following impressive numbers :

  • 1,000 auto manufacturers and suppliers statewide
  • 115,939  employed in auto manufacturing jobs
  • $80,867,444 invested by the state since 2006 for automotive industry training
  • Eight interstate highways provide immediate access to Tennessee cities for inexpensive and convenient auto transport
  • $6,011,801,340 annual payroll for Tennessee’s auto industry

        Perhaps more impressive is the substantial R&D spending by the automotive industry.  In order to keep pace with ever growing consumer demands for sophisticated new technologies, the automotive sector spends considerably more than other industries on innovation and R&D.

        Globally, the industry spent more on R&D in 2013 than ever before as manufacturers try to stay ahead of fierce competition from both the technology industry and competitors within their own sector.  Research and development spending by the car industry has grown at an annual rate of eight percent over the past four years, almost three times the rate of increase seen between 2001 and 2012, according to research by the Boston Consulting Group.

        The automotive industry in Tennessee is no exception to this trend.  The state is a leader in public sector R&D for the industry, ranking second among automotive manufacturing states and eighth in the nation, despite the fact that it is only a fraction of the size of many larger states.

        Today’s automobile represents the most sophisticated technology brought to market.  Recent technology allows cars to “see” all around, gathering data on possible roadway conditions and essentially giving drivers eyes in the back of their heads.

        In addition to visual capabilities, cars may soon be “talking” to each other and to the roadway as well.  Car-to-car information sharing can alert vehicles miles behind that the cars ahead have come to a halt, warning drivers to prepare to slowdown. 

        “Smart” intersections will allow stop signs and traffic lights to communicate with vehicles, as sensors report, for example, if another vehicle is running a red light.  Traffic lights could be synchronized to improve traffic flow and fuel efficiency so that if there is only one vehicle on the roads at a particular time it would only see green traffic lights. The visual below demonstrates vehicle-to-vehicle communication.

Car-to-Car
 

        As large innovators in Tennessee like Nissan, Volkswagen, and General Motors research and experiment with these technologies, they provide anchors to the automotive industry in the state.  Nonetheless, over 900 other automotive manufacturers and suppliers are located throughout the state whom produce equally innovative component parts and technology developments.  Some of these companies are discussed below.


SL Tennessee
        SL Tennessee (Clinton, TN) is a segment of SL America, a leading global automotive supplier with a proven commitment to innovation.   The company strives to be the most innovative automotive market supplier. Their goal is to provide end users with designs that improve safety, reliability, and quality of life using innovative and world class manufacturing techniques.  Some innovative technologies at SL include 360 degree views of the environment around the car as well as turn signal/power folding outside and inside mirrors that include special camera displays as demonstrated below.


Surround View Monitoring
            System
*Surround View Monitoring System


Camera Display
*Camera Displays as demonstrated above




In addition to automotive R&D, the company also takes innovative measures to reduce costs. Some of these are discussed in their statement below:

“As a manufacturer, we genuinely feel it is our responsibility to make products while consuming fewer precious resources, less energy, and reducing hazardous emissions. Our facilities are equipped with state of the art lighting and control systems along with generous use of natural lighting. Ceiling ducts draw wasted heat from manufacturing operations at SL Tennessee and transport it to cooler areas of the plant. The reclaimed heat reduces natural gas consumption and CO2 emissions by thousands pounds per year.”

        Like product developments, innovative cost savings techniques are eligible for R&D tax credits as well.  Moreover, projects such as the one described above are usually eligible for certain alternative energy tax credits.  For more on alternative energy tax credits visit www.energytaxsavers.com.


Remington Industries
        Remington Industries (Ooltewah, TN) is an interior automobile accessories company that is committed to innovation.  At Remington, engineers believe that the only way to make the bestCar Mat products on the road is to never stop innovating.  Remington holds a number of patents including their latest innovation involving interlocking floor mats.  For most manufacturers, a floor mat is just a commodity.  Remington, on the other hand, takes this product seriously by investing substantial R&D in order to provide a “smart, sensible solution that helps protect your investment in your car season after season.”  The innovation lies in the material, which is a special blend of commercial grade rubber compounds designed to create a product which exceeds expectations for function and performance.  Although floor mats seem like the most basic of technologies, the company has recently patented designs and prides itself in floor mat innovation. For more on the automotive sector see “The R&D Tax Credit Aspects of South Carolina”.


Chemicals and Plastics

        Tennessee’s chemical and plastics industry is providing solid benefits to the state.  The segment is one of the state’s six core industry groupings. More than 800 chemical and plastics related businesses operate in Tennessee, providing employment for more than 52,000 people. Exports of chemical and plastics products have exceeded $3.5 billion in the state for the past several years and have more than doubled in the past 10 years .  For more on chemicals and plastics see “The R&D Tax Credit Aspects of the Plastic Manufacturing Industry.

        The major reasons for such a strong chemical and plastic presence in Tennessee are its proximity to major markets, relatively low labor costs, and innovative state programs to assist companies wishing to locate or expand. 

        Tennessee’s largest employer in the chemical/plastics industry sector is Eastman Chemical Co., headquartered in Kingsport. Eastman employs more than 6,500 workers there and has annual revenues of more than $5.8 billion. The facility manufactures hundreds of chemicals, fibers and plastics found in products that people use every day.
Eastman officials cite several reasons why they like the Volunteer State, including its positive business climate, skilled workforce, excellent quality of life, great interstate highway and rail systems, and strong educational institutions .

        The Eastman facility has more than 550 buildings and about 4,000 acres of land, with its main production facility covering 900 acres. Eastman recently completed a five-year, $1.3 billion reinvestment project to upgrade and the Kingsport location.

The chart below demonstrates the history of innovation in the cosmetics industry at Eastman. For more information on cosmetics see “The R&D Tax Credit Aspects of Cosmetics”.


History of
            Innovation in the Cosmetics Industry


Aerospace

        Tennessee is flying high when it comes to leadership in the aerospace and defense industry. The Volunteer State has more than 100 companies devoted to aerospace and defense-related activities.
        Micro Craft Inc. is an employee-owned company based in Tullahoma. Micro Craft, founded in 1958, provides engineering, manufacturing, and testing services for aerospace companies of all sizes, including NASA.  Transfer of these technologies and other innovations to the private sector has created new industries in the U.S, resulting in substantial cost savings for companies and consumers, and proving jobs for Americans. For more information on this topic see “The R&D Tax Credit Aspects of a Non-Dysfunctional Airline Industry.


Food Production

        Tennessee’s broad range of food producers provides much economic stability to the state.  Compared with other industries, food production is relatively stable.  “We don’t go up when the economy goes up and don’t go down when economy goes down,” says Steve Harrison, a vice president at Bush Brothers & Co., the 101-year-old food company known for its baked beans with headquarters in Knoxville and a large plant in Chestnut Hill.  While the company is largely known for its classic product, it often introduces new varieties, including a line of “grilling Food Productionbeans” in 2008 that Harrison describes as “more robust” and mixed with other vegetables.

        Achieving such robustness or other varying textures and consistency often involves significant R&D.  The process is further complicated by the need to meet government guidelines and consumer health specifications.  Producers compete on nutrition, shelf-life length, taste, texture and cost.  They often have contingents of chemists, scientists and nutritionists constantly seeking to better their product.  

        Generally, innovative producers aim toward more nutritional content.  Still, consumers won’t buy the product if it contains excess amounts of fat, sugar, and salt. Consumers today are more concerned than ever with exactly what goes into their food.  Thus, the problem is two-fold - How can food producers create a product that meets consumer taste expectations without sacrificing nutritional content?  For more on this topic see “R&D Tax Aspects of Gluten-Free Foods” and “The R&D Tax Aspects of Salt Reduction.


Alcohol
        A recent whiskey war has been brewing in the heart of the Volunteer State and it largely surrounds an innovation issue.  Jack Daniel’s master distiller Jeff Arnett recently urged state lawmakers to stick with a state law enacted in 2013 that requires any product labeled as ‘Tennessee whiskey’ to be made from 51 percent corn, aged in new charred oak barrels, filtered through maple charcoal and bottled at a minimum of 80 proof. 

        Many new distillers have been coming to the state and experimenting with various production processes.  Opponents of the law argue that it could prove too restrictive and will stifle innovation.  Supporters argue that it has been understood for 150 years exactly what Tennessee whiskey is. Thus, there should be a law that will keep all producers within that framework.  The debate comes at a time when breweries are innovating more than ever.  Recent bottling and packaging technologies combined with millennia’s desire for variety in their alcoholic beverages provide much opportunity for R&D.  For more on this topic see “The R&D Tax Credit Aspects of Kentucky”.


Smart Ovens
        Today, like many technologies surrounding the Internet of Thing, ovens are becoming quite clever.  Imagine being able to cook your dinner on the way home from work or while sitting in the dentist’s chair.  That’s what TMIO -- Tonight’s Menu Intelligent Ovens – in Chattanooga has recently been developing.  The Connect Intelligent Oven is not only an oven, but also a refrigerator.  By placing a prepared meal in the oven before leaving home, the appliance can also keep it cold until ready to cook.  “Dinners placed in the refrigerated appliance before the consumer goes to work are done by the time he or she arrives home,” says TMIO President and CEO David Mansbery.  “If plans change, there’s no problem. Using their cellular phone or logging on to the Internet, they can delay the cook time, change the cook temperature, refrigerate after cooking, set a warming mode or cancel the cook cycle altogether.” According to TMIO research, the Connect Intelligent Oven can reduce meal preparation time by up to 33 percent – giving the cook more time for family and friends.

        TMIO recently moved its engineering operations to Chattanooga from Cleveland, Ohio. According to management, the Ohio-based company decided to locate engineering operations to Chattanooga due to the area’s long association with the manufacturing of cooking appliances, specifically wall ovens. “The community offers a well-trained workforce in this industry that we needed to bring our product to market,” CEO David Mansberry says.  Trevor Hamilton, vice president of economic development for the Chattanooga Area Chamber of Commerce, responded to the re-location - “TMIO represents the kind of high-tech manufacturing company that is one of our primary recruitment targets – one that plays to the strength of our manufacturing heritage, coupled with exciting new technologies.”

        TMIO technologies proved to be exiting indeed.  Their intelligent ovens have received an enormous amount of attention from the media, including being featured on CNBC’s “Power Lunch,” ABC’s “Good Morning, America”, and HGTV.  The patented TMIO internet-controlled refrigerated oven recently won the Reader’s Digest “Best of America” award .  For more on smart appliances see “The Internet of Things Creates R&D Tax Credit Opportunities”.


University Research

The University of Tennessee Knoxville
        As a research-extensive institution, graduate and undergraduate students at the University of Tennessee are given the opportunity to delve deeply into a broad range of subjects including zero-energy University of Tennesseehousing, supercomputers, aerospace, and advanced manufacturing.  At the University of Tennessee Space Institute (UTSI), current work revolves around active programs in aerospace engineering, mechanical engineering, physics, aviation systems, engineering management, and a variety of other activities.  One specific project involves the “Hypersonic Vehicle Electric Power System (HVEPS).”  The Center for Laser Applications (CLA) has led the UTSI research program to help develop MHD generators for a new generation of high-speed Air Force vehicles. The generator would provide short bursts of high power electrical energy to supply laser or other beamed energy weapon systems. UTSI’s effort, part of a program led by General Atomics, focuses on computational modeling and sub-scale tests of the MHD generator .


Pellissippi State Community College
        Pellissippi State Community College is dedicated to providing a state-of-the-art environment for education and workforce development.  It is crucial that the region have a skilled workforce that can meet the demands of an increasingly sophisticated manufacturing centered economy.  Last fall, the college launched the Automated Industrial Systems (AIS) Pellissippi Stateconcentration as part of the Engineering Technology program. AIS prepares students to operate state-of-the-art automated manufacturing equipment, including programmable controller training systems, robotics, and motor training equipment.

Conclusion

        The economy in Tennessee is robust and diverse.  All modern industries in the state are driven by innovation.  Federal and state R&D tax credits are available to stimulate the efforts of economic progression. 

Article Citation List