iTip of the Month: Litigation may be the most appropriate or only route when a taxpayer has been denied a credit(s) to which he or she feels entitled to receive. But, as the cases outlined below indicate, it makes good business sense to engage knowledgeable counsel who is aware of all potential procedural issues to avoid dismissal of an otherwise sustainable cause of action.
Recent Announcements of Credit/Incentives Applications and Packages
California- On December 15, the California Alternative Energy and Advanced Transportation Financing Authority announced that electric car manufacturer Tesla Motors Inc. will receive roughly $39 million in sales tax exclusions through a California incentive program designed to promote high-tech jobs. Tesla was granted the incentives for $464 million in qualified purchases in 2015 and 2016. The carmaker is the largest single recipient of exclusions through the Sales and Use Tax Exclusion Program run by the authority this year. The five-year-old program has an annual cap of $100 million.
Tesla has also been one of the main beneficiaries of the program in previous years, with $23.6 million in exclusions in 2011 and $34.7 million in 2013. In a release, state treasurer John Chiang said the program is positioning the state to create thousands of jobs and nurture its technology industry. This is the first year that the program has spent up to its cap.
The tax exclusions are specifically intended for companies that develop renewable energy and advanced transportation technologies, or use sophisticated manufacturing processes or recycled materials, particularly plastics. Other companies that have benefited from the program include SSLof Palo Alto, Rolls-Royce High Temperature Composites Inc.of Huntington Beach, and GKN Aerospace Chem-Tronics Inc. of Santa Ana.
California- The California Film Commission has announced that 11 television productions will receive tax incentives under the state's expanded film tax credit program, includingMistresses,Rosewood, andSharknado 4. One of the productions,Mistresses, is moving to California from Vancouver, Canada.
Four relocated TV series are now participating in California's tax credit program, the commission noted. BesidesMistressesfrom the latest application round,Veephas relocated from Maryland,Secrets and Liesfrom North Carolina, andAmerican Horror Storyfrom Louisiana. The final recipients in the latest round were selected from the program's second application period in 2015, which opened November 30 and closed December 6. The $42 million in tax credits allocated in this round are estimated to bring $254 million of in-state spending by the productions.
Nevada- Nevada AB 1, signed into law as Chapter 1, requires the Office of Economic Development to create and implement workforce training and diversity hiring programs; the bill is part of a package of legislation providing tax breaks for Smart car developer Faraday Future to build a center at the Apex Industrial Park in the state.
Faraday Future will receive at least $215 million in incentives from Nevada for choosing a Las Vegas suburb as the site of its $1 billion U.S. production facility, under a deal with the company announced December 10 by Governor Sandoval. The California-based company chose Nevada after considering several other states.
Ohio- On December 15, Governor John R. Kasich announced the approval of assistance for 14 projects set to create 1,091 jobs and retain 1,417 jobs statewide. During its monthly meeting, the Ohio Tax Credit Authority (TCA) reviewed economic development proposals brought to the board by JobsOhio and its regional partners. Collectively, the projects are expected to result in $53.1 million in new payroll and spur more than $320 million in investment across Ohio.
Projects approved by the TCA include: (1) Exceptional Innovation, Inc.expects to create 102 full-time positions, generating $9.1 million in new annual payroll and retaining $4.7 million in existing payroll as a result of the company's expansion project in the City of Westerville. Exceptional Innovation designs, builds and implements solutions for the hospitality market. The TCA approved a 2.158 percent, nine-year Job Creation Tax Credit for this project; and (2) MedVet Associates, LLCexpects to create 41 full-time positions, generating $3 million in new annual payroll and retaining $3.9 million in existing payroll as a result of the company's expansion project in the City of Worthington. MedVet provides specialty and emergency veterinary care. The TCA approved a 1.461 percent, six-year Job Creation Tax Credit for this project.
Legislative, Regulative and Gubernatorial Update
Alabama- Effective January 4, 2016, the Alabama Department of Revenue has amended Rules 810-3-61-.03 through 810-3-61-.05 and Rule 810-3-61-.07 in order to conform these rules to changes made by Act 2015-434 to the credit for contributions made to scholarship granting organizations (SGOs). Among the changes made to the rules, Rule 810-3-61-.02 provides that: (1) the maximum allowable credit for an individual taxpayer who is claiming the credit as the result of a donation to an SGO by an Alabama S corporation or a Subchapter K entity is limited to 100% of the individual's pro rata or distributive share of the donation or $50,000, whichever is less; (2) a donor may not receive anything of value from the SGO in return for the gift nor place any restrictions on the use of the donated funds; and (3) other than credits claimed by individual taxpayers who are shareholders of Alabama S corporations or partners/members of Subchapter K entities, credits may only be claimed by the donating individual or corporate entity.
Colorado- Effective December 15, 2015, the Colorado Department of Revenue amended regulation Colo. Code Regs. 39-22-2102 (Colorado Low-Income Housing Tax Credit). The regulation that discusses the allocation of the credit for pass-through entities provides, among other things, that the owner of a qualified development project receiving an allocation of a Colorado low-income housing credit may allocate the credit among its partners, shareholders, members, or other constituent taxpayers in any manner mutually agreed upon, and the regulation is amended to mandate that the owner submit with the Colorado Partnership or S Corporation Return their Colorado State Low-Income Housing Tax Credit Allocation Certificate along with a schedule detailing how the credit is allocated. In addition, each partner, shareholder, member, or other constituent taxpayer must attach a copy of such allocation certificate and allocation schedule to their Colorado income tax return. Once the credits are claimed on their respective income tax returns, the allocation cannot be amended for that tax year. The regulation is also amended to include a carryforward provision.
Colorado- Effective December 15, 2015, the Colorado Department of Revenue amended regulation Colo. Code Regs. 39-22-522 (Conservation Easement Credit). Highlights of some of the amendments include making permanent the emergency regulation (effective July 15, 2015) providing that a nonprofit corporation can claim a gross conservation easement credit for a conservation easement donation it made to a qualified organization regardless of whether it has unrelated business taxable income. However, a nonprofit corporation which has a state governmental entity as a shareholder cannot claim the credit.
Donor limitations were also amended for donations made on or after January 1, 2015 (including donations made by pass-through entities) providing that the credit cannot exceed $1,500,000 (75% of the first $100,000 plus 50% of the next $2,850,000) as well as providing that the limits apply in the aggregate to a married couple (regardless of whether they file jointly or separately), all partners, shareholders, or members of all pass-through entities, and all tenants in common, joint tenants, and similar ownership arrangements that make a donation. In addition to further amendments, a transferred credit can never give rise to a refund, nor can such a credit be carried back to a tax year prior to the year of purchase.
Georgia- The Georgia Department of Revenue has adopted Reg. Sec. 560-7-8-.56, Historic Rehabilitation Tax Credit, effective January 1, 2016, applicable to certified rehabilitations completed on or after January 1, 2017, regardless of when the rehabilitation was started. The allowed credit is 25% of the qualified rehabilitation expenditures for the certified rehabilitation of a historic home, with an additional 5% if the historic home is located within a target area. This credit is claimed by filing Form IT-RHC with the completed final certification from the Department of Natural Resources (DNR) with the taxpayer's Georgia income tax return.
In addition, a 25% credit of qualified expenses is allowed for certified rehabilitations of any other certified structure, other than a historic home. For this credit the taxpayer must seek preapproval from the DNR and must file a claim for the credit via electronic submission of Form IT-RHC-AP and the precertification from the DNR through the Georgia Tax Center. The regulation also specifies reporting requirements, credit limitations, and provides rules on the carryforward, recapture, sale and transferability of the credits.
Kentucky- The Kentucky Cabinet for Economic Development has announced that it is accepting 2016 qualified investment applications for angel investment tax credits. The Office of Entrepreneurship within the Kentucky Cabinet for Economic Development operates the program. To be eligible for tax credits, angel investors and small businesses must first be approved by the Cabinet prior to the investment. Applications to become a qualified investor or a qualified small business are accepted on an ongoing basis.
Angel investors must also apply for tax credits prior to making an investment and the Kentucky Economic Development Finance Authority must approve each application before credits are issued. For 2016, the program offers a total $3 million in tax credits, available on a first-come, first-served basis. Individual investors are limited to $200,000 in credits annually.
Michigan- Michigan SB 616 as signed into law in December 2015 provides a sales tax exemption for data center equipment sold to an operator of a qualified data center or a co-located business, from January 1, 2016, through December 31, 2021, and up to December 31, 2035, if job requirements are met. The exemption under this section only continues to apply after January 1, 2022, if the contractors of the qualified data centers, collectively, have, in aggregate, established in this state at least 400 data center industry jobs or data center industry related jobs, or a combination of both, since January 1, 2016.
The exemption under this section only continues to apply after January 1, 2026, if the numbers gathered by the local economic development corporations are certified and reported to the department of talent and economic development and subsequently forwarded to the department and demonstrate that the qualified data centers, the colocated businesses, and the contractors of the qualified data centers, collectively, have, in aggregate, established in this state at least 1,000 data center industry jobs or data center industry related jobs, or a combination of both, since January 1, 2016.
Michigan- Public Act 218, effective December 15, 2015, provides that no new exemption certificates for rehabilitating commercial property under the Commercial Rehabilitation Act can be granted after December 31, 2020 (previously, no new certificate could be granted after December 31, 2015). Under the Act, a qualified local governmental unit can establish one or more qualified rehabilitation districts, and the owner of a qualified facility in a commercial rehabilitation district may apply for a commercial rehabilitation exemption certificate with the local governmental unit for the qualified facility.
New Jersey- The New Jersey Assembly passed A3624 on December 3 that would block financial incentives for companies that flee to other countries to avoid paying federal taxes, legislation that Democratic lawmakers predict will help retain Garden State businesses and boost its workforce.
The bill applies to "inverted domestic corporations" - current or former U.S. companies that incorporate in another nation or become a subsidiary of a foreign company - and received 45-31-3 approval. Twin legislation is pending in the Senate. The law prohibits such companies from receiving contracts and development subsidies funded by New Jersey and independent state authorities.
New Jersey- The New Jersey Assembly passed L. 2015, A4413 (c. 167), effective December 2, 2015 and operative 60 days after that date, which provides that New Jersey public agencies are prohibited from providing economic development subsidies of more than $25,000 if the recipient business is in default on any previously awarded loan or loan guarantee. The term economic development subsidy refers to the provision of an amount of funds to a business by or from a New Jersey public agency for the purpose of stimulating economic development in New Jersey, including, but not limited to, any bond, grant, loan, loan guarantee, matching fund, tax credit, or other tax expenditure.
New Jersey- The New Jersey Economic Development Authority has proposed to amend rules on the Grow New Jersey Assistance program to allow business successors and affiliates to automatically qualify for incentives under some circumstances and to clarify program requirements for time periods, minimum capital investments, and job eligibility.
New York- New York Governor Andrew Cuomo announced the designation of 11 new Brownfield Opportunity Areas (BOAs) in New York State. The Brownfield program provides participants with assistance in transforming dormant and blighted areas into productive communities of economic growth and development.
North Carolina- The North Carolina Department of Revenue issued an important notice reminding taxpayers that recently enacted legislation provides a sales and use tax exemption for the sale at retail or the storage, use, or consumption in North Carolina of electricity for use at a qualifying datacenter and datacenter support equipment to be located and used at the qualifying datacenter on or after January 1, 2016.
Effective January 1, 2016, a "qualifying datacenter" is a datacenter that satisfies each of the following conditions: the datacenter meets the wage standard and health insurance requirements; and the Secretary of Commerce has made a written determination that at least $75 million in private funds has been or will be invested by one or more owners, users, or tenants of the datacenter within five years of the date the owner, user, or tenant of the datacenter makes its first real or tangible property investment in the datacenter on or after January 1, 2012. Investments in real or tangible property in the datacenter made prior to January 1, 2012, may not be included in the required investment.
South Carolina- The Department of Revenue ("DOR") issued South Carolina Information Letter No. 15-22 on December 26, 2015 reminding taxpayers that the application deadline for the angel investor credit for investments made during 2015 is December 31, 2015. In addition, applications submitted for investments made in future years must be made by December 31st of the year the investment is made. Since the total credit allowed to all taxpayers is limited to $5 million in any year, an investor seeking to claim the credit must submit an application to the DOR for approval; applications received after the deadline will not be considered.
To assist taxpayers during the first year of the credit and its application process for investments made in 2014, the General Assembly enacted a temporary budget proviso to extend the application deadline to July 31, 2015, or the date the aggregate credit cap was reached, whichever was earlier. This temporary proviso only applies to investments made in 2014. If the General Assembly reenacts this proviso for the next fiscal year or any future fiscal year, then the application deadline for the credit will be extended in accordance with the provisions of that proviso.
Texas- The Texas Comptroller of Public Accounts adopted new rules, 34 Tex. Admin. Code § 3.340, effective November 30, 2015, relating to qualified research and development. A taxable entity is not eligible for a credit on a report against the franchise tax for qualified research expenses incurred during the period on which the report is based if the taxable entity, or a member of the combined group if the taxable entity is a combined group, received a qualified research and development sales tax exemption. The new rules conform to the statutory provisions as they relate to both the sales tax exemption and the franchise tax credit.
Virginia- Virginia Governor Terry McAuliffe has proposed a new Research and Development Tax Credit with a statewide annual cap of $15 million. The credit is designed to benefit companies with more than $5 million in annual research spending. The new credit becomes effective in Taxable Year 2016 with a sunset date of 2026. Additionally, Governor McAuliffe proposed to strengthen the existing R&D Tax Credit by raising the statewide cap from $6 million to $7 million and extending the sunset date from 2019 to 2026. Governor McAuliffe is also proposing an increase in the cap on Virginia's Angel Investor Tax Credit, from $5 million to $9 million, with $2 million earmarked for bioscience projects.
Case Law
Michigan- In Teddy 23, LLC, et al. v. Michigan Film Office, et al., Mich. Ct. App., Dkt. No. 323299, December 15, 2015, the Michigan Court of Appeals affirmed the court of claims' dismissal of a case involving the denial of a movie company's postproduction certificate, finding the court of claims correctly found it lacked jurisdiction over disputes involving the Michigan Film Office because it was separate and distinct from the Treasury Department, and the case should have been brought before the circuit court. However, the Court of Appeals also affirmed the circuit court's dismissal of the company's application for leave to appeal on the grounds that it was untimely filed.
Oregon- In Cascade Kelly Holdings, LLC, v. Oregon Dept. of Energy, Or. Ct. App., Dkt. No. A152224, 12/16/2015, the Oregon Court of Appeals determined that the change in the law through the sunset of the business energy tax credit has made it impossible for the court to direct the Department of Energy ("Department") to issue final certification for more than $8 million in energy tax credits to the taxpayer. By virtue of the sunset provision, which came into effect on July 1, 2014, while this appeal was pending, the preliminary certificates that were issued to the taxpayer expired. Consequently, they no longer serve as the base for the issuance of final certificates or certified amount letters for the remaining balance of the certified eligible costs, because the Department has no statutory authority to issue the final certification. Furthermore, the court found that the taxpayer was not entitled to attorney fees because it was not a type of proceeding specifically designated by the statute that authorized an award of attorney fees.
Interesting Updates
All states- New rules requiring state and local governments to track and disclose tax abatements are now in effect, according to the Governmental Accounting Standards Board. GASB Statement No. 77, "Tax Abatement Disclosures," requires governmental entities to provide details on the different programs they offer, the amounts they're spending on them, and other costs associated with the programs, starting with reporting periods beginning after December 15.
Although the information should now be tracked as affected entities prepare for their comprehensive annual financial reports, most reports including that information will not be released until 2017, according to GASB. The changes are expected to provide increased transparency in the realmof tax incentives and allow for more meaningful comparisons between the states by requiring standardized data rather than the various measures and metrics now used in individual states' tax expenditure reports.
Included in the new reports will be a description of each economic development program under which taxpayers can enter into an agreement with the jurisdiction to receive an abatement, along with details of the program's purpose, statutory authority, clawback provisions, and annual cost.
The new requirements will affect all jurisdictions using GASB's reporting requirements, which a GASB report previously said included all but one state, roughly 70 percent of medium-size and large entities, and 98 percent of all state and local government revenue in the country.
Oregon- State lawmakers are calling for a criminal investigation into the sale of tax credits issued by Oregon to renewable energy project developers, just as Governor Kate Brown and legislative leaders hash out how to regulate sales of remaining credits to close out the troubled program.
In a letter released December 7 and forwarded to the Oregon district attorney, U.S. attorney, and the FBI among others, legislators urged investigation into the business energy tax credit (BETC) program. The lawmakers said whistleblowers have raised concerns that Department of Energy and Department of Revenue ("DOR") staff had violated the law in how they handled sales of tax credits given to in-state renewable energy developers through the now-defunct program.
The BETC program allowed developers -- including public entities with no liability -- to sell their credits for cash through a transfer process run by the Department of Energy, or via independent sales. The program came under fire when it expanded substantially after 2007, and it was revealed that many developers were allowed by the Department of Energy to independently sell their credits at much steeper discounts than were sanctioned under the energy department's own rules for the sales it arranged.
BETC was ended by lawmakers in 2014, and following a critical audit of the program, Brown announced September 3 that she intended to work with lawmakers to review the program and address outstanding credits not yet sold. But the December 7 letter argues that a criminal investigation is needed, as "violations of state and federal law may have occurred." Specifically, lawmakers wrote that they were told by former Department of Energy and DOR staff that at least one buyer of tax credits was given the opportunity to purchase credits without a bidding process; that sales were improperly discounted by staff; that capital gains on the purchase of discounted tax credits weren't properly reported; and that the DOR chose to ignore the latter issue.
Washington- The richest package of state tax exemptions and preferences in U.S. history, the package given to Boeing from the State of Washington, faces a concerted assault in the state's upcoming legislative session from labor leaders and lawmakers disgruntled by what they say is the loss of jobs to other states. Specifically, union machinists and aerospace engineers hiked the halls of the state legislative offices asking lawmakers to scale back a lucrative tax break for the Boeing Co. if it continues moving jobs to other states. They have asked lawmakers to consider HB 2147 which would require Boeing maintain a minimum number of jobs to keep its tax break. HB 2147 lapsed in the House Finance Committee in the 2015 session.
