May 23, 2022

Volume XII, Number 143


May 20, 2022

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November 2016 Tax Credits & Incentives Update

Tip of the Month: Given the budget shortfalls, some state legislatures introduced sweeping legislature to review certain programs such as the potential elimination of enterprise zones in Illinois.  Please note that if these bills are passed, they may be retroactively applied thereby eliminating benefits which may have been negotiated but not awarded, or just yet, benefits that have already been awarded.  While retroactive legislation seems inherently wrong, states are seeing some significant wins on the state tax cases involving such legislation.  Therefore, those who are negotiating incentive deals need to proceed with more caution than ever. 

Incentive Packages

Indiana- Indiana announced that the Indiana Economic Development Corporation has offered CliqStudios LLC -- a Minnesota-based cabinet company -- up to $1.8 million in conditional tax credits and up to $200,000 in training grants for its plan to invest $5.1 million in new office space and create up to 200 new jobs by 2020. 

Legislative, Regulative and Gubernatorial Update 

California- The California Governor's Office of Business and Economic Development (GO-Biz) announced that the California Competes Tax Credit committee approved $60.9 million in tax credits for 74 companies expanding, creating a projected 6,568 jobs and generating over $670 million in total investment in the state. 

California- The California Film Commission has issued a production alert with respect to the upcoming application window for the California Film and TV Tax Credit Program 2.0 that will run from January 2 through January 13, 2017. During that window, applications will be accepted for feature films ($85 million of non-transferable credits are available but additional funds may become available; the credit will apply to a maximum qualified spend of $100 million but there is no total budget cap) and for independent films ($6 million of transferable credits are available but additional funds may become available; the credit will apply to a maximum qualified spend of $10 million but there is no total budget cap). 

City of Chicago- The City Council voted 46-0 to create a special TIF district to help rebuild the Chicago Transit Authority's Red Line on the North Side.  The TIF specifically will generate a projected $823 million over the next 35 years, money needed to match $1.1 billion in federal funds Mayor Rahm Emanuel hopes to get from the U.S. Department of Transportation before President Barack Obama leaves office next month. Today is the deadline to apply for the federal "core capacity" grant, and to be eligible the city must show it has a source to provide local matching funds. 

Georgia- The Georgia Department of Revenue has amended the conservation tax credit rule to extend its sunset date to December 31, 2021, as provided in recently enacted legislation; to require that forms be submitted to the department through the Georgia Tax Center; and to clarify other issues. 

Illinois- HB 293, which was initially a shell bill has been amended, provides for no new enterprise zones and no extensions for existing zones, eliminates the remaining carry forward amounts of the expired research and development credit, and eliminates the charity care credit for for-profit hospitals.

Michigan- The Michigan Senate passed two key economic development packages aimed at increasing job growth through tax incentives to out-of-state companies and offsetting costs for large urban development projects.

Senate bills 1153, 1154 and 1155 collectively create a $250 million program that would allow up to 15 business projects each year to hold on to income taxes withheld from new employees instead of remitting those funds to the state as long as the companies pledge to create at least 250 to 500 jobs, depending on how much they pay their employees.

Under the legislation package, business expansions that create a minimum of 500 qualified jobs that pay at least the county's average wage would be eligible for a five-year, 50-percent abatement on the income tax withholdings from new employees. Companies creating at least 250 qualified jobs in which the wages are at least 125 percent of the county's average wage, would be eligible for a 10-year, 100-percent abatement.

Bill 1153 specifically calls for the creation in June 2017 of a Michigan Business Withholding Abatement Program to provide economic assistance to authorized businesses that provide certified new jobs and limits the total amount of withholding abatements to $250 million.

Bill 1154 specifies that a portion of the taxes withheld from each certified new job will be retained by the employer, and Bill 1155 outlines business' reporting requirements and the state Treasury Department's revenue collection responsibilities under the program.

Nebraska- The Nebraska Department of Revenue issued Revenue Ruling 29-16-1 that sets forth the required wage and investment levels for Nebraska Advantage Act applications filed on or after January 1, 2017.

New Jersey- The New Jersey Division of Taxation announced that five urban enterprise zones (UEZ) expire on December 31, 2016, and businesses located in those areas can no longer use UEZ or contractor's exemption certificates past January 1, 2017, for purchases of tangible personal property and services used exclusively at UEZ locations.

New York- New York A 9415, signed into law as Chapter 420, increases the number of counties in the state in which services can be performed to qualify for the empire state film production credit.  However, three weeks later, New York Gov. Andrew Cuomo vetoed legislation to establish tax credits for music and video game production.

Review of Incentive Programs 

Maine- The Maine Legislature's Joint Committee on Government Oversight voted November 17 to introduce legislation that would revamp the state's business tax incentive program and set a 10-year economic plan for Maine.  Sen. Christopher Johnson suggested splitting the draft legislation into two bills -- one for the state economic plan and the other for business tax incentive reform -- because the first was "easy for people to understand" while the latter goes "a little into the weeds." However, other members quashed his suggestion, saying it would be best for lawmakers to consider both subjects together for a broader economic perspective. 

Committee co-chair Sen. Roger Katz  told Maine Public Radio that the Government Oversight Committee has studied how Maine business tax incentives encourage business in the state. He noted that part of the legislation would require greater oversight of the tax incentives, which total several billion dollars a year.

Virginia- The Virginia Joint Legislative Audit and Review Commission issued its report on the management and accountability of the Virginia Economic Development Partnership (VEDP), finding that the organization was not efficiently or effectively managed and recommending that the VEDP be given more tax information on companies that have received incentive awards, and that it strengthen its administrative procedures with the assistance of the Department of Taxation.   

Case Law

Georgia- In a letter ruling, the Georgia Department of Revenue stated that a subsidiary, after having acquired another company, cannot include any of the acquired company's quality jobs tax credit or utilize any its quality jobs tax credit carryforward because the quality jobs tax credit statute, Ga. Code Ann. § 48-7-40.17, does not contain a sale, merger, acquisition, or bankruptcy provision which allows unused income tax credits to be transferred and continued by the transferee. Thus, when there is a sale, merger, acquisition, or bankruptcy of the taxpayer, the quality jobs tax credit is lost and cannot be utilized by any taxpayer. However, for future years, jobs tax credits can be earned by subsidiary for full-time jobs created by the acquired company as long as those jobs are maintained by the subsidiary. Thus, subsidiary will be eligible to claim jobs tax credits in tax years for jobs created by the acquired company in the same manner and to the same extent as the acquired company would have been eligible to claim such credits, provided subsidiary maintains the jobs and meets all other applicable requirements. No. LR IT-2016-01, 03/15/2016, released 10/28/2016.

New York-In the Matter of the Petition of Purcell, N.Y.S. Tax Appeals Tribunal, Dkt. No. 825436, 11/14/2016, the Tax Appeals Tribunal has reversed an administrative law judge's determination that the Division of Taxation improperly reduced the resident taxpayer's Qualified Empire Zone Enterprise (QEZE) allocated income by applying the business allocation percentage of the taxpayer's S corporation in calculating the tax factor component of the tax reduction credit permitted under N.Y. Tax Law § 16. The Tribunal found that the statute's reference to a "shareholder's income from the S corporation allocated within the state" means that the numerator of the tax factor fraction must equal the shareholder's New York source income from the S corporation, and not all income the resident taxpayer received from the S corporation. The Tribunal noted that this interpretation is reasonable as it treats all QEZEs alike irrespective of business form, and also treats resident and nonresident shareholders equally, because both receive the same credit amount as the tax factor includes all S corporation income allocated within New York.

West Virginia- Affirming the circuit court's decision, the Supreme Court of Appeals of West Virginia (Court) applied the Complete Auto test developed by the U.S. Supreme Court in Complete Auto Transit, Inc. v. Brady, 430 US 274, 97 S Ct 1076 (1977) and held in favor of taxpayer CSX Transportation, Inc. (CSX), a Virginia corporation that operates an interstate rail transportation system with trains and rail yards operating throughout West Virginia, by holding that the sales tax credit provided by W. Va. Code § 11-15A-10a, which offsets the use tax a fuel importer is required to pay under West Virginia law, applies both to sales taxes paid to other states and to sales taxes paid to the municipalities of other states. In 2010, an auditor from the West Virginia State Tax Department conducted a field audit of one of CSX's West Virginia rail yards and determined that CSX imports fuel that it uses in West Virginia and directed CSX to begin paying the West Virginia Motor Fuel Use Tax on the fuel it uses in West Virginia. Following the assessment, CSX filed amended use tax returns seeking a refund of the sales taxes it had paid on its motor fuel purchases to cities, counties, and localities of other states. CSX's refund request was rejected; so it appealed to the West Virginia Office of Tax Appeals (OTA) which granted the refund request and vacated the assessment because it determined that CSX was entitled to the credit for the sales tax it paid on the motor fuel purchases from the localities of other states under the dormant Commerce Clause, and the circuit court upheld the OTA's decision. This Court affirmed the circuit court's order by considering each of the factors of the Complete Auto test and concluded that both the OTA and the circuit court ruled correctly in determining that the sales tax credit granted by W. Va. Code § 11-15A-10a extended both to sales taxes paid to other states and to sales taxes paid to the subdivisions of other states.Matkovich v. CSX Transportation, Inc., W. Va. S.Ct. App., 15-0935, 11/16/2016.

Interesting Update 

Oklahoma- Oklahoma's zero-emission facilities tax credit, which mostly benefits wind generating facilities, is a "significant threat" to the state's budget, according to a November 4 report commissioned by a state incentive evaluation panel.

Oregon- Oregon lawmakers may urge the state's Department of Justice to recover some of the tax incentives awarded to fraudulent renewable energy project developers, in light of a September audit that identified numerous abuses of the program.

Washington- A World Trade Organization panel ruled on November 28 that Washington state's $8.7 billion incentive package for Boeing Co. put the United States in violation of its international trade obligations.  The case came to the WTO through a complaint lodged two years ago by the European Union, which argued that the subsidies in the bill were de jure and de facto contingent on the use of domestic goods rather than imported goods, which would violate the WTO's subsidies and countervailing measures (SCM) agreement. 

The subsidies were approved in 2013 as part of an effort to secure new manufacturing jobs in Washington. They included a preferential business and occupation (B&O) tax rate for aerospace manufacturers and suppliers; business tax credits; and sales, use, excise, and property tax exemptions.  Those incentives were contingent on a siting provision that required Boeing to manufacture its new 777X in the state. A second siting provision would have terminated the favorable B&O rates if that manufacturing operation had left the state.

A panel of the WTO's dispute settlement body was convened to consider the EU complaint in April 2015, and it has been gathering evidence, holding hearings, and drafting its findings since then.  Its report concluded that the incentives in question were subsidies within the meaning of the SCM agreement, but it said that none of them was individually contingent on the use of domestic goods.

But after looking at the operation of the first and second siting provisions in tandem, it concluded that the B&O rates linked to them were de facto contingent on the use of domestic goods, putting them outside the terms of the SCM agreement and putting the United States outside its obligations under the agreement.  The report recommended "that the United States withdraw [the subsidy] without delay and within 90 days."

© Horwood Marcus & Berk Chartered 2022. All Rights Reserved.National Law Review, Volume VII, Number 3

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