January 29, 2022

Volume XII, Number 29


January 28, 2022

Subscribe to Latest Legal News and Analysis

January 27, 2022

Subscribe to Latest Legal News and Analysis

January 26, 2022

Subscribe to Latest Legal News and Analysis

October 2015 Tax Credits and Incentives Update

HMB Tip of the Month: One primary issue with state tax credits and incentives is failing to comply with the applicable jurisdiction's reporting requirements.  In order to ensure timely compliance and avoid defaulting on an incentive award (and possible clawback and other future repercussions), it is best practice to either (1) maintain an internal database with each and every reporting requirement for all relevant jurisdictions and assign a department (rather than one individual) the task of compliance; or (2) have a trusted consulting firm handle the compliance requirements for your company.  

Recent Announcements of Credit/Incentives Applications and Packages

Ohio- On October 26, 2015, Governor Kasich announced the approval by the Ohio Tax Credit Authority ("TCA") of assistance for nine projects set to create 875 jobs and retain 1,120 jobs statewide. Collectively, the projects are expected to result in $43.7 million in new payroll, and spur approximately $204.6 million in investment across Ohio.  Projects approved by the TCA include the following: 

(1) Advics Manufacturing Ohio, Inc., City of Lebanon (Warren Co.) who expects to create 260 full-time positions, generating $10.9 million in new annual payroll and retaining $33.7 million in existing payroll as a result of the company's expansion project in the City of Lebanon (Warren Co.). The TCA approved a 1.538 percent, six-year Job Creation Tax Credit for this project.

(2) Atlantic Pacific Equipment, Inc., City of Marion (Marion Co.) who expects to create 10 full-time positions, generating $660,000 in new annual payroll as a result of the company's new project in the City of Marion (Marion Co.). Atlantic Pacific Equipment is a scaffolding business. The TCA approved a 1.116 percent, five-year Job Creation Tax Credit for this project.

San Francisco, California- According to reports issued by San Francisco's Office of the Treasurer and Tax Collect in October, thousands of San Francisco businesses, including biotechnology and clean technology firms, avoided more than $44 million in payroll expense taxes last year as part of incentives aimed at attracting new businesses to the city and encouraging old ones to stay.

The biggest impact of the tax exclusion programs was seen in the Central Market and Tenderloin area, a traditionally low-income neighborhood near downtown San Francisco, where six businesses collectively excluded nearly $2.5 billion in payroll expenses, representing a forgone payroll expense tax of $33.67 million. The tax exclusion for this neighborhood was introduced in 2011 at a time when the city was struggling to emerge from the recession and unemployment hovered near the double digits, and now, the tax breaks helped attract new investments that have transformed Central Market into a hub for 17 technology companies, 2venture capital firms and 40 new storefronts.

Companies also realized savings as a result of other tax exclusion programs for clean technology and biotechnology firms that were adopted in 2006 and 2010, respectively. 
Nine biotechnology businesses, with a total of almost 700 employees, were spared from paying up $2 million, while six clean technology firms were relieved from paying close to $200,000 in payroll expense taxes for 2014.

The reports also showed that more than 4,000 small businesses avoided about $8.5 million collectively last year as a result of the net new payroll expense tax exclusion program introduced in 2012.

Legislative, Regulative and Gubernatorial Update

California- In early September, California lawmakers approved legislation that would allow small businesses to convert a portion of the state's tax credit for research and development into cash grants.  However, on October 10, 2015, AB 437 was vetoed by Governor Brown.

California provides tax credits to help defray costs associated with businesses' efforts at innovation. AB 437 would have allowed businesses that receive that subsidy to convert into cash the portion of their credit that they can't claim against their income taxes. In particular, AB 437 would have allowed up to 10 percent of a business's unused tax credits from 2015 and 2016 to be converted into grants in 2017. For excess credits issued between 2017 and 2022, a business would have been eligible for up to 15 percent of cash grants.

California- On October 8, 2015, the California Film Commission has readopted emergency regulations governing the film and television tax credit available for tax years beginning after 2015 against the state's corporate income and franchise tax, personal income tax, and sales and use tax. The previously adopted emergency regulations expired on October 13, 2015.

California- Governor Brown late last month signed a bill authorizing cities to create local community improvement-focused property tax increment financing authorities -- four years after he led the charge to eliminate such entities.

The legislation (AB 2) authorizes local governments to create redevelopment agencies, called community revitalization and investment authorities, within which they can bond against a portion of revenues from property tax growth to pay for community improvement activities, including affordable housing and acquiring property for development through voluntary sales and the use of eminent domain.

Brown's approval of the bill could potentially validate cities' complaints that the elimination of tax increment financing agencies in 2011 robbed them of a critical community improvement tool.  The legislation contains provisions intended to prevent the abuse of power allegedly engaged in by previous redevelopment agencies. But opponents aren't placated, and some say the new law will allow local governments to resume an alleged pattern of condemning private property to acquire it for sales-tax generating retailers.

The bill does implement a public process that allows community members and property owners to provide input, protest, and even vote on an authority's plan. Authorities are also subject to community review every 10 years, allowing voters to halt their operations.  Moreover, local governments have to get permission from other taxing entities present in the district where an authority would be created to use those entities' portion of the future property tax increment generated there.

Illinois- An Illinois state senator has filed legislation (SB 2184) that would end Illinois's Economic Development for a Growing Economy (EDGE) credit program until the state is able to pass a budget.  Senator Andy Manar said that it is not fair to continue providing tax incentives to corporations while funding for state services is in question during the budget impasse.  In addition, he said, he has "legitimate questions regarding the overall effectiveness of the program."

Massachusetts- The Massachusetts Department of Revenue has issued a directive (Directive 15-3) explaining and clarifying the extent to which expensing deductions and depreciation and bonus depreciation deductions under the IRC affect the basis on which the state investment tax credit and economic development incentive credits are calculated.

New Jersey- The New Jersey Senate on October 22 advanced a bill that would limit tax incentives for companies that have defaulted on prior state incentives.  The Senate voted 37 to 0 to approve A 4413, which passed the House on a 75-0 vote in June. The bill would prohibit the state from awarding economic development subsidies to any business that "previously received an economic development subsidy that was a loan or loan guarantee if the recipient business is in default on that previously awarded loan or loan guarantee." For purposes of the bill, an economic development subsidy includes economic incentives in the form of tax credits, bonds, grants, loans, loan guarantees, matching funds, and other tax expenditures.

North Carolina- North Carolina Gov. Pat McCrory (R) on September 30 moved tax provisions in the state budget a step closer to ratification when he signed a bill (HB 117 -- dubbed the North Carolina Competes Act) to increase funding for job development incentives and establish multiple sales tax exemptions.

HB 117 was one of two bills that needed to be passed in order for several provisions of the state budget to go into effect. The budget bill, HB 97, was signed by McCrory on September 18 and included personal income tax rate cuts, a transition to single-sales-factor apportionment, a study of market-based sourcing, and changes in the state franchise tax. 

Those changes, however, were contingent on the enactment of HB 117 and HB 943. HB 943 was signed by the Governor on October 20 and puts before voters a $2 billion bond package to be used for "updating the State's public facilities for the 21st century."

HB 117, as signed, expands the state's Job Development Investment Grant (JDIG) program and provides sales and use tax exemptions for various specified industries.  The JDIG program provides a discretionary incentive of annual grants given directly to new and expanding businesses. The grants are calculated off the amount of personal income tax withholdings generated by the new employees hired by the business. The bill expands the program's $15 million annual cap to a $20 million annual cap.

Under the bill, the cap is enlarged to $35 million for a JDIG awarded to a "high-yield project," which is one that invests at least $500 million of private funds and creates at least 1,750 new full-time positions.  HB 117 also establishes several sales and use tax exemptions, one being an exemption from sales and use tax purchases of electricity and support equipment used at qualifying data centers in which at least $75 million has been invested. The measure includes a clawback provision if a data center fails to fulfill the requirements for the incentive.

Ohio- The Ohio House on October 1 referred a slate of bills to the Ways and Means Committee ahead of its next scheduled meeting on October 6. The package consists primarily of proposals for new income and sales tax incentives.

Among them is HB 269 which would allow a refundable income tax credit to encourage the development of the sound-recording industry.  It would allow a credit for 25 percent of eligible expenditures over $5,000 for productions of sound recordings or capital projects designed to facilitate such productions. Projects would be limited to $50,000 in credits, and the program would be limited to $3 million annually. Credits could be awarded for tax years 2015 to 2019.

HB 297 would allow another refundable income tax credit -- this one worth 50 percent of qualified expenditures incurred in planning or building a manure storage facility, or acquiring equipment to transport, handle, or apply manure.  The credit would be limited to expenses that help the taxpayer comply with water safety laws regulating the application of manure.

HB 281 would allow an income tax deduction for higher education expenses. The bill would deduct from Ohio adjusted gross income any payments for tuition, fees, books, supplies, or room and board while enrolled in a post-secondary education program at an eligible educational institution. The deduction would be limited to $10,000 annually and could be deferred until the taxpayer is no longer enrolled.

Rhode Island- The Rhode Island Division of Taxation, in conjunction with the state Commerce Corporation, has added a 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.

The Rhode Island Division of Taxation, in conjunction with the state Commerce Corporation, has adopted regulations CR 15-18 to implement and administer the Qualified Jobs Incentive, a tax credit for qualifying businesses in a targeted industry that create at least 10 new full-time jobs in the state.

The Rhode Island Division of Taxation, in conjunction with the state Commerce Corporation, has adopted a new 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.

Washington- The Washington Department of Revenue has announced that the commute trip reduction tax credit, which offers a credit to employers who provide commute reduction incentives to employees, has been extended to July 1, 2024, and summarized changes to the credit program such as the increased statewide credit allowance cap of $2.75 million.

Review of Programs

Ohio- Public policy groups on the left and the right are pushing Ohio lawmakers to reconsider their approach to tax incentives, asking them to scale back the state's efforts to direct economic development or at least provide more accountability for those programs.

At a Senate Ways and Means Committee hearing on October 7, Zach Schiller of Policy Matters Ohio said a formal system for reviewing tax expenditures in Ohio is badly needed.

"It is important also that a review committee be established permanently . . . and not just for a one-time review," he said. "We urge the committee to approve the bill as a first step toward providing the accountability for tax expenditures that Ohio needs."

Schiller's testimony came as lawmakers considered HB 9, which would establish a joint legislative committee to review the state's 100-plus tax expenditures and make annual recommendations on the merits of maintaining their availability. The bipartisan committee would include three members from the House, three from the Senate, and the tax commissioner.  HB 9 would also require that any bill proposing to establish or modify a tax expenditure include a statement detailing its objectives.

Case Law

South Carolina- The South Carolina attorney general issued an opinion on October 19, 2015 addressing a company's untimely application for an angel investor tax credit, and concluded that the Department of Revenue has the fiscal authority to accept the application.  Specifically, the attorney general stated that while they see nothing in the statute addressing a late or untimely application, since the statute mentions a timely application, they believe a court would determine that how to handle an untimely application is within the discretion of the Department of Revenue and will support such a determination to allow an untimely application, noting the pro rata distribution of the tax credits.  They also believe that this interpretation is consistent with the legislative intent, which is to "to encourage angel investors to invest," increasing the State's "base of wealth-creating businesses" and supporting those businesses that are attempting to "commercialize technology invented in this State's institutions of higher education.

Interesting Updates

California- FilmL.A. Inc. has announced that on-location film production in Los Angeles increased 3.8 percent in the third quarter of 2015, primarily because of a 54.5 percent increase in television production, with 20.8 percent comprising the first round of television projects that qualified under California's new film incentive program.

District of Columbia- In testimony before the Council of the District of Columbia's Committee on Finance and Revenue on October 14, 2015, John Ross of the CFO's office said the office is not certain that the Advisory Board Company needs $60 million in property tax incentives, currently proposed under Bill 21-353, in order to remain in the District and hire additional District residents.

The proposed legislation would provide up to $60 million of incentives to the Advisory Board Company to remain in the District. The incentives are structured as a real property tax abatement for a planned commercial development in Mt Vernon Square, and are made contingent on the Advisory Board leasing at least 425,000 square feet for 15 years, meeting certain targets for the number of District residents it employs, and adhering to a negotiated community benefits agreement. The District will credit the abatement to the owner of the commercial property, but the owner is expected to pass the abatement on to the Advisory Board.

Federal- Senator Edward Markey on October 30 urged the National Highway Traffic Safety Administration ("NHTSA") to re-evaluate whether Volkswagen Group should pay back tax credits it earned for complying with fuel economy standards since the world now knows the automaker cheated emissions tests.  Markey, who co-authored the 2007 Corporate Average Fuel Economy, or CAFE, standards law that established the tax credit, told the agency that he reviewed VW's CAFE compliance records and believes the automaker consistently exceeded the standards it was originally found to have met for the model year vehicles implicated in the emissions testing scandal.

"In light of VW's illegal use of defeat devices to circumvent emissions controls, it is my belief that NHTSA should immediately re-analyze and, as appropriate, reverse any CAFE benefits VW might have enjoyed as a result of illegal behavior," Markey said in his letter to NHTSA Administrator Mark Rosekind.

Maryland- On October 21, 2015, the Maryland Office of Legislative Audits released an audit report on the state's Department of Business and Economic Development, highlighting a lack of comprehensive procedures for the March 2012 premium tax credit auction and a lack of program regulations for the film production activity tax credit program.

The audit disclosed that comprehensive procedures had not been developed for administering the March 2012 Premium Tax Credit auction, which was an initiative to infuse funds received from the auction into qualified start-up and early-stage Maryland companies. Proceeds from the auction totaled $84 million in exchange for $100 million in insurance premium tax credits to the winning bidders (insurance companies). There was minimal documented guidance regarding the auction process, including the bidding methodology.

New York City, New York- Mayor Bill de Blasio announced the release of an independent study conducted by the Boston Consulting Group that highlights the economic impact of the city's 30 percent film tax credit program for qualifying production expenditures, which is credited with bringing $8.7 billion into the local economy.

Montana- The author of a Montana bill that would allow tax credits for donations to scholarship organizations has said that the fate of the legislation is likely to be decided by a state court.  Senator Llew Jones said the Montana Department of Revenue's proposed rules for implementing S.B. 410 don't reflect the bill's intent by excluding churches, schools, colleges or universities owned or controlled by a religion or denomination from qualifying for the credit. As such, courts will likely have to decide whether the legislation is constitutional-and whether the Montana Department of Revenue overstepped its authority by weighing in on the bill's constitutionality.

According to Jones, S.B. 410 was an attempt to enhance educational opportunity in the state by offering an income tax credit of up to $150 for donations to scholarships covering tuition paid to qualified education providers, which would exclude public schools and home schools.  The bill, which was enacted in May without Governor Bullock's signature, does not reference religious schools, but says that the credit must be administered in compliance with the Montana Constitution, which generally limits the state from spending money to further sectarian purposes.

According to Department implementing rules proposed Oct. 15, the law therefore limits qualified education provider to exclude "a church, school, academy, seminary, college, university, literary or scientific institution, or any other sectarian institution owned or controlled in whole or in part by any church, religious sect, or denomination." Individuals employed by those same institutions also wouldn't be eligible.  Mike Kadas, department director, stated that in drafting the implementing rules, the department concluded that Article 10 of the Constitution superseded what may have been the intent of the bill. 

Rhode Island- Rhode Island launched new incentive programs aimed at spurring economic growth across Rhode Island. Applications for the Qualified Jobs Incentive Tax Credit and The Rebuild Rhode Island Tax Credit are now available online. 

The Qualified Jobs Incentive encourages new job creation through both business attraction and growth. This incentive provides a base tax credit (1) for companies relocating to the state and creating a minimum number of new jobs and (2) for current Rhode Island companies growing their in-state workforce by a threshold percentage. The annual base tax credit is $2,500 for each new full-time job created, with possible add-ons of up to $5,000 per job if specific criteria are met. The first 500 jobs approved under the program will receive the maximum credit allowed.

The Rebuild Rhode Island Tax Credit fosters growth in construction and real estate development by providing a tax credit of up to 20 percent of project costs to qualified real estate projects of $5 million or more that demonstrate a financing gap. The credit may be increased up to 30 percent for designated project types and locations. November 25, 2015 is the initial deadline for Rebuild Rhode Island applications; the Commerce Corporation will begin reviewing and advancing applications upon receipt.

© Horwood Marcus & Berk Chartered 2022. All Rights Reserved.National Law Review, Volume V, Number 308

About this Author

2018 Go To Thought Leader AwardWe help companies navigate complex State and Local Tax issues so they can achieve their business goals. We offer clients:

  • A nationally recognized State and Local Tax team with a deep understanding of multi-state SALT issues across the country, first-hand experience working in-house in large corporate tax...