iThis post continues a monthly series outlining updates in state tax credits and incentives; included here are legislative, gubernatorial and case law updates. While tax credits and incentives have their fair share of critics, they are a reality in today's competitive business environment in which states compete with each other for jobs and investment. Regardless of the criticisms, state tax credits and incentives benefit many kinds of entities in a number of different ways.
Tip of the Month:
More and more states are offering transferable state income tax credits as incentives for businesses to expand or locate within their boundaries or otherwise engage in state-supported economic development or other projects. When taxpayers "earn" transferable state income tax credits that they cannot utilize, states will permit them to sell these credits to other taxpayers who can utilize them in order to realize and recognize (or "monetize") such benefits. When purchasing tax credits, Taxpayers must keep in mind the following considerations: institute a formal due diligence process, only transact with trusted entities, only purchase transferable credits or provide tax credit equity through a properly documented transaction, ensure your statutory ability to utilize purchased credits, plan ahead when forecasting future liabilities to effectively reduce liabilities, and whether buying or selling credits ensure that you are getting the right price.
Recent Announcements of Credit/Incentives Applications and Packages
California: On August 17, 2015, the California Film Commission announced its list of the first non-independent feature films and independent projects selected to receive tax credits under the state's recently expanded Film and Television Tax Credit Program 2.0. In all, 11 productions have received conditional approval -- 8 non-independent feature films and 3 independent projects. The list includes projects set at least partially in other locales that have been especially aggressive in their effort to use tax credits to lure film and TV production. These projects include Conjuring 2 (United Kingdom) and Why Him (Michigan).
Connecticut: Governor Dan Malloy acknowledged on August 24 that he has offered an incentive package to global business giant General Electric Co. in an attempt to keep the company's headquarters in the state. GE threatened to leave the state earlier this year when the Democratic legislative leadership proposed to increase taxes on businesses -- including mandating combined reporting retroactively. The legislature eventually approved a scaled-back version of the plan -- including a one-year delay in the implementation of mandatory unitary combined reporting -- but kept a number of tax increases in place. Malloy declined to detail what sort of incentives his GE proposal contains, but he indicated that he does not think the package would require legislative approval.
Illinois: Amazon delivered a package to the Illinois economy on August 10, 2015 - 1,000 full-time jobs at what will be its first warehouse in the state. In return, Amazon received a tax break of up to 10 years from the state in exchange for its promise to invest $40 million in a retrofitted 500,000-square-foot Joliet fulfillment center. Amazon will be able to credit employee withholding taxes against its corporate income tax bill for up to a decade. The company is missing out on other tax incentives, thanks to the state's budget impasse. Joliet did not offer any local incentives, but the city did offer to expedite its permitting process to allow an existing warehouse at I-53 and Laraway Road to be quickly retrofitted.
Maryland: The Maryland Department of Agriculture announced that on August 25, it approved a $1.2 million grant for a farm technology demonstration project that could lead to a reduction in the volume of chicken manure and water pollution that results from spreading it on fields. Renewable Oil International MD LLC received the grant and will install patented "bio-refinery" technology at one farm. The agency said the technology is expected to reduce the volume of poultry manure by 50% to 63%, yielding several products -- bio-oil, which can be marketed as an asphalt extender or fuel additive; bio-char, a charcoal-like product used to enhance compost; and a mixture of gases that can be used as a heat source to dry the poultry litter.
Missouri: Missouri football fans hoping to prevent the St. Louis Rams from returning to California got a big boost in August when the Missouri Development Finance Board approved $15 million in tax credits for a new NFL stadium in downtown St. Louis. The approved plan and additional anticipated tax credits of $35 million over the next three years are contingent on $30 million in funding from the Regional Convention and Sports Complex Authority and a lease agreement of at least 30 years with an NFL team. The nearly $1 billion stadium, planned to be built beside the Mississippi River, is backed by Governor Jay Nixon, who formed a stadium task force led by businessman Dave Peacock and Bob Blitz, who was part of the legal team that helped bring the Rams to St. Louis from Los Angeles in 1995.
In addition, on August 17, 2015, the Missouri Department of Economic Development announced that an Israeli biotechnology company is will establish its U.S. headquarters at the Bio-Research & Development Growth (BRDG) Park in St. Louis. Evogene's expansion to Missouri includes a $1 million capital investment and is expected to create 15 new high-paying jobs in the next three years.
New Hampshire: On August 31, 2015, Governor Maggie Hassan and Department of Revenue Administration announced that 184 New Hampshire businesses received tax credits in 2015 as part of the state's research & development tax credit program. Seventy five of the companies receiving the tax credit reported less than $500,000 of qualified wages, which according to the Governor demonstrates that the program continues to support smaller businesses in their efforts to grow and create jobs.
New Jersey: On August 11, 2015, the New Jersey Economic Development Authority approved a modified version of a $390 million tax incentive for the construction of the retail and amusement complex now known as American Dream Meadowlands. Under the modification, the $390 million incentive cap remained the same, but represented a smaller percentage - 13.59% - of the overall cost of the project, according to the EDA. The incentive was first approved in 2013. The modification comes after a project redesign resulted in an increase in leasable area, additional project costs and a corresponding increase in eligible costs. The total project is now expected to cost $3.18 billion, with $3.12 billion in eligible costs under the terms of the incentive package. The eligible costs were originally expected to reach about $2.22 billion. As part of the package, the developer - Mall of America owner Triple Five Worldwide - needs to invest a minimum of $2.87 billion. American Dream Meadowlands is expected to feature 2.3 million square feet of leasable retail and restaurant space, which represents about 75% of the leasable area, with an indoor amusement and waterpark sitting adjacent to the retail area, according to the EDA.
States' Evaluation and Review of Credit and Incentive Programs
Multistate: In August 2015, the Governmental Accounting Standards Board (GASB) approved Statement No. 77, Tax Abatement Disclosures, which requires state and local governments to report on foregone revenue from tax abatement agreements. The rule goes into effect for fiscal years that begin after December 2015. That means reporting under the new standard would not begin appearing until 2017.
The rules will apply to the agreements made by state and local governments with companies to waive or reduce sales, property and income taxes, typically to attract jobs and investment. Although most states already report some information on tax abatements, the rule will make the disclosures standardized and will apply to local governments.
The rule will not apply to all tax incentives. Under the rule, a tax abatement is defined as an agreement between one or more governments and an individual or entity in which the government foregoes tax revenue to which it is entitled in exchange for a promise by the entity to take a specific action that contributes to economic development or otherwise benefits citizens.
The rule will require governments to disclose the specific tax being abated, the gross dollar amounts of revenues lost as a result of the abatement, the types of agreements made by the recipients of the abatements and provisions for recapturing the lost taxes if included as part of the agreement. Governments will also have to reveal information about revenues lost by agreements made by other governments. Though some public comments on the rule asked that individual recipients of tax abatement agreements be identified by name, the final rule does not require it.
California: California's state auditor will review the state's corporate tax subsidies to examine their effectiveness and how much they benefit the state. Specifically, on August 25, 2015, the California Joint Legislative Audit Committee approved the request for an audit by Senator Ricardo Lara, with bipartisan support. The inquiry will look at six of the largest corporate tax credits and incentives provided by the state over the past three fiscal years, based on the Department of Finance's tax expenditure report. California gives out roughly $5 billion in corporate tax subsidies annually. The audit will identify the legislative purposes behind the incentives and credits in question and determine their cost to the state, the benefits, which types of credits and incentives appear to work best, and what potential impact a cap on total expenditures for tax credits would have on California.
Legislative, Regulative and Gubernatorial Update
Massachusetts: Governor Charlie Baker on August 5, 2015, approved legislation to increase the state's earned income tax credit (EITC) and delay the implementation of the Statement of Financial Accounting Standards No. 109 (FAS-109) for five years. The governor's signature finalized an agreement to retain the earned income tax credit and maintain the FAS-109 deduction, which had been eliminated in the state's fiscal year 2016 budget.
New Jersey: The New Jersey Economic Development Authority has modified certain eligibility requirements under the New Jersey Technology Business Tax Certificate Transfer Program relating to the sales of unused net operating loss and research and development tax credits to unrelated profitable corporations, adding filing requirements for the program, and clarifying the amount to be forfeited where there is a recapture of tax benefits, effective August 17, 2015.
In addition, on August 17, 2015, the New Jersey Economic Development Authority proposed to amend Urban Transit Hub Tax Credit Program rules to clarify and conform application and reporting deadlines, and to amend Grow New Jersey Assistance Program rules to clarify administration of the program for Atlantic City
New Jersey State Senator Tom Kean Jr. is proposing a bill (S 2721) that would grant income tax exemptions to A-list entertainers performing in Atlantic City and other New Jersey cities. To be eligible for the exemption, the A-list performers must perform in New Jersey up to four times a year. The real question is what is a "A-list performer."
Rhode Island: On August 26, 2015, the Rhode Island Division of Taxation, in conjunction with the state's Commerce Corporation, proposed regulations to implement the Quality Jobs Incentive (Regulation CR 15-18), a tax credit for qualifying businesses in a targeted industry that creates at least 10 new full-time jobs in the state. The Rules implement the newly-enacted Rhode Island Qualified Jobs Incentive Act of 2015 which provides tax credits to qualifying businesses for new full-time jobs created in Rhode Island. To qualify, a business in a "targeted" industry must create a minimum of 10 new jobs and, if it has more than 100 employees in the state, it needs to create jobs equal to either 10% of its workforce in state or 100 employees. A business in a "non-targeted" industry must create a minimum of 20 new jobs, and, if it has more than 200 employees in the state, it needs to create jobs equal to either 10% of its workforce or 100 new jobs. The jobs must pay, at a minimum, the median hourly wage for the state, though the Corporation may exempt economically fragile industries, such as manufacturing, from that requirement. The eligibility period for the credits can be up to 10 years, and the business must agree to keep the jobs in Rhode Island for at least 20% longer than the period of time it is eligible for credits. The maximum amount of the credits available per job is $7,500.
On August 26, 2015, the Rhode Island Tax Division also proposed to add a rule (Regulation CR 15-19) to implement the newly-enacted Rebuild Rhode Island tax credit, which can provide up to $15 million in tax credits, to be allocated over five years, to a real estate development project. Finally, on August 26, 2015, the Rhode Island Division proposed a new regulation (Regulation CR 15-17) to implement the newly-enacted Anchor Institution tax credit, which provides a credit to an anchor institution that plays a substantial role in getting a material supplier, service provider, or customer to relocate to the state.
Interesting Updates
Illinois: A decades-old program of enterprise zone tax breaks for business development has become the latest state program caught up by the Illinois budget impasse. On August 16, 2015, the Illinois Department of Commerce and Economic Opportunity announced that it would not certify nearly 50 enterprise zone economic development districts statewide as a result of the budget impasse. The state fiscal year started July 1. Enterprise zones typically provide sales tax breaks and other financial incentives for business development in return for creating or maintaining a specific number of jobs. Under Illinois law, the state approves enterprise zone boundaries and certification. Local governments, in turn, are able to negotiate tax incentives for economic development under the program created in 1982.
Oregon: Steeply discounted sales of Oregon tax credits meant to fund renewable energy projects have come under scrutiny by state lawmakers who say the practice abused the subsidy program. Lawmakers may consider legislation to claw back some of the value of tax credits sold at deep discounts by buyers to developers who received them for creating renewable energy projects in the state. Meanwhile, the Office of the Secretary of State appears to be looking into the issue as well.
The program under which the tax credits were awarded and sold is the now defunct Business Energy Tax Credit (BETC) program, which was designed to spur the growth of the renewable energy industry in Oregon. The program ran for 35 years but was expanded significantly in 2007, resulting in a glut of applications by energy project developers. Tax watchdogs said that the program had grown out of control and lacked proper oversight. Lawmakers reined in the program and let it sunset in 2014.
Spokeswoman Rachel Wray of the Oregon Department of Energy (DOE), which administered the BETC program, explained that when the program was still running, project developers that didn't use their credits against their income could sell those credits for cash to other companies. She said those sales occurred in one of two ways -- through the DOE-overseen passthrough process, in which the department arranged the sale and determined the price of the credits; or through an independent transfer, where project developers themselves privately arranged the sale of the credits with little DOE involvement. While the DOE had a formula for determining the price of credits that included a state-approved discount, credits sold through independent sales, in order to attract buyers, sometimes were sold for well below the values calculated by the formula.
An ongoing, separate program -- the Energy Incentives Program -- currently offers some tax credits for renewable energy projects in the state.
Case Law
Federal: On August 27, 2015, the U.S. District Court for the Southern District of Ohio handed down sentences to four individuals for perpetrating a scam to gain profit and tax credits from manufacturing substandard biofuels. According to an Aug. 27 Justice Department release, Dean Daniels, Richard Smith, Brenda Daniels and William Bradley, all of Florida, profited by fraudulently creating and selling biodiesel credits (renewable identification numbers) and claiming biodiesel tax credits for the production of fuel that wasn't actually biodiesel. The four pleaded guilty to conspiracy to commit wire fraud and to defraud the U.S. Dean Daniels was sentenced to 63 months, Bradley to 51 months, Smith to 41 months, and Brenda Daniels to 366 days in prison.
Illinois: A Chicago production studio that is suing Illinois over alleged favors for a competitor is now battling with another adversary: its bank, which has pushed the company into bankruptcy. Affiliates of Chicago Studio City, which runs a 100,000-square-foot facility in Austin, has asked a judge to toss involuntary Chapter 7 bankruptcy petitions that ABC Bank filed against them in June. John Crededio, the longtime owner of the studio, owes the Chicago-based bank nearly $6.7 million and has defaulted on some of that debt, according to a motion to dismiss the case filed yesterday in U.S. Bankruptcy Court in Chicago. The studio has a long list of credits going back to its creation in 1979, including ER, The Dark Knight and Oceans Eleven. It blames its recent troubles squarely on Illinois officials, accusing the state's film office of steering film and television producers to Cinespace Chicago Film Studio, a rival that opened in 2010.
Last year, in the final days of the Quinn administration, the Illinois Department of Commerce and Economic Opportunity awarded a $10 million grant to Cinespace, money that was returned in March after an investigation by the Chicago Sun-Times. In May, two Chicago Studio City affiliates filed a federal lawsuit against the state, accusing it of giving Cinespace preferential treatment. As a result, "business has declined precipitously, to the point that it is in danger of going out of business," the lawsuit said. The state has denied the allegations and filed a motion to dismiss the lawsuit.
