The National Law Forum

The Blog of the The National Law Review

February 2015 State Tax Credit and Incentive Update

Horwood Marcus & Berk Chartered Law Firm

This is the second in a monthly series outlining updates in state tax credits and incentives, including legislative, gubernatorial and case law updates. While we recognize that tax credits and incentives are often criticized by some tax policy experts, they are a reality in today’s competitive business environment with states competing with each other for jobs and investment. The good news for both corporate taxpayers and non-profit entities is that state tax credits and incentives are available and can benefit a business in many ways.

Recent Announcements of Credit/Incentives Applications and Packages

Arizona: Just three weeks after Apple Inc. announced plans to invest $2 billion over 10 years to open a data center in Arizona, on February 25, 2015, the Arizona Legislature passed a bill (HB 2670) that would grant millions of dollars in business tax incentives to Apple. Under the bill, international operations centers, such as the 1.3-million-square-foot digital command center Apple plans to build in Mesa, would be eligible for a renewable energy tax credit worth up to $5 million. The credit could be used for up to five years.  HB 2670 would also exempt international operations centers from the transaction privilege tax, an annual tax break of $1.2 million, according to the bill.

A company would be required to make a total of $1.25 billion in capital investments over 10 years, including the cost of land, buildings, and equipment. The company would also be required to invest at least $100 million in one or more renewable energy facilities over a three-year period. A company that fails to make at least $100 million in capital investments each year could remain eligible for the tax incentives by paying to the Department of Revenue the amount of utility relief the company would have otherwise been granted for that tax year.

California: In February 2015, the California Governor’s Office of Business and Economic Development (GO-Biz) announced that it has received 253 applications with a combined tax credit amount of $289 million for the third California Competes Tax Credit Application period, which closed February 2, 2015.  The pool of credits available is $75 million and is expected to be awarded on April 16, 2015. In the first two application periods, 400 companies asked for $500 million in credits from a pool of $29 million awarded to 29 companies in June 2014, and 286 companies asked for $329 million from a pool of $31 million awarded to 56 companies in January 2015. A total of $151.1 million is available in the 2014-15 fiscal year, with one more round of applications and award of the final $31.1 million scheduled for June 18. In the next fiscal year, $200 million will be available for the credit.

New Jersey: A New York apparel company is moving from New York City to Jersey City. The retailer, Charles Komar & Sons Inc., will be moving its headquarters and 500 employees to Jersey City. In return, the state will be providing a $37.2 million tax break, including negotiated incentives.

Legislative, Regulative and Gubernatorial Update

California: On February 25, 2015, the California Legislative Analyst’s Office presented state lawmakers with options for a state earned income tax credit (“ETIC:”), including a “piggyback” on the federal EITC, a state match for the federal EITC for low-income working families, and a supplement to the federal EITC for childless adults.

Permanent regulations governing the California Competes Tax Credit program took effect February 5, 2015, to replace temporary regulations adopted Feb. 20, 2014. The final version of the regulations makes a few minor changes from the temporary regulations. One of the changes specifies that companies can apply for and win the credit multiple times, but each time they will be evaluated based on new commitments for investment and pay to workers in California. The final regulations also require applicants to assert that absent the credit award they “may” terminate or relocate employees, rather than “will” terminate or relocate.

The Franchise Tax Board (“FTB”) must review the books and records of all businesses receiving the credit that have more than $2 million in annual gross receipts to determine if they have met the milestones for employment, wages and investment required under their contracts with the state. If the FTB determines that a business has a material breach of its contract, either through failure to timely provide information for review, a material omission or incorrect information, or failure to meet milestones for employment, wages or investment, the agency will notify GO-Biz. It will be up to the five-member GO-Biz California Competes Tax Credit Committee to make a final decision whether businesses must pay back the credit due to a breach.

On February 12, 2015, the California Film Commission released draft emergency regulations to implement the state’s film and television tax credit program newly expanded under 2-14 AB 1839, which increased funding to $300 million per fiscal year, expanded eligibility, and eliminated budget caps for independent films and the state’s lottery system. The draft now goes to the governor’s Office of Administrative Law for review and final approval. The draft document is posted on the Film Commission’s website under “News & Notices.”

In related news, California will hold a final lottery under the old program on April 1. The new incentives plan will allot funds based on how many jobs productions employ, among other criteria, such as the use of California visual effects companies and production facilities.

For the first time, the program allows all new TV shows to qualify – not just on basic cable like under the current plan – as well as movies with budgets above $75 million. However, the up-to-25% credit applies only to the first $100 million of a movie’s costs, and that may cool the enthusiasm of studios when planning shoots on big budget projects. Despite the improvements, California’s incentive plan is smaller than some rival states with whom they are fighting for a slice of the production pie.

Illinois: On February 13, 2015, SB 707 was introduced which would entitle interactive digital media companies to an income tax credit in an amount of 30% of expenses incurred for an accredited production in a taxable year. The credit would be able to be carried forward or transferred.

Louisiana: On February 27, 2015, Louisiana Gov. Bobby Jindal proposed to change some of the state’s individual and business tax credits from refundable to nonrefundable, which according to his fiscal 2016 executive budget proposal would save the state $526 million. Refundable credits which would be affected include, but are limited to, inventory tax credit, research and development credit, angel investor credit and historical rehabilitation residential credit.

Louisiana: Louisiana lawmakers on February 24, 2015, released draft bills that would scale back the state’s generous film tax credit by setting clear limits on the program and making related costs to the state more predictable. Currently, the credit may be used to offset personal or corporate income tax liability in the state. The program provides a transferable tax credit of up to 35 percent of total in-state expenditures with no cap and requires a minimum of $300,000 in spending. The credit can be transferred to Louisiana taxpayers or back to the state for 85% of its face value. State Sen. Jean-Paul Morrell’s draft bill would cap the total amount of film credits allowed for one year at $300 million, but what isn’t used in that year could be carried forward to the next. Under Rep. Julie Stokes’ bill, the credit could be transferred only once, and the state’s buyback percentage would be increased from 85 cents to 90 cents on the dollar.

Michigan: In February 2015, Michigan Gov. Rick Snyder delivered his proposed 2016 budget, offered a projected budget for fiscal 2017, and signed an executive order to reduce expenditures in the fiscal 2015 budget to account for what the Governor stated is a revenue shortfall that has resulted from businesses claiming tax credits granted during the last decade.

Furthermore, the Governor indicated that he wants to renegotiate the tax incentive agreements the state has with 240 companies. It turns out the state owes about $9.4 billion in tax credits to companies that created jobs in Michigan. That liability costs the state about $500 million a year, a cost that will continue until 2029. The tax credits reduce a company’s liability under the Michigan Business Tax (MBT).  The Governor’s administration wants to negotiate with the companies the timing of the credits’ use because currently the companies can claim the credits whenever they want.  Of those companies owed the MBT tax credits, Chrysler, General Motors, and Ford alone are owed about half of the balance (over $4 billion) in MBT credits.

Texas: On January 30, 2015, the Texas Comptroller of Public Accounts proposed regulations (Prop. Tex. Admin. Code §3.599) aimed at implementing the state’s Research and Development Activities Credit, which can be applied against a taxpayer’s franchise tax. The proposed rule implements H.B. 800, which was enacted in 2013 and creates a credit for certain expenses from research and development activities. The proposed rule applies to franchise tax reports originally due on or after Jan. 1, 2014, and expires on Dec. 31, 2026.  Unused credits may be carried forward for no more than 20 consecutive reports. The total credit claimed for a report, including the amount of any carryforward credit, cannot exceed 50% of the amount of franchise tax due for the report before any other applicable tax credits. The proposed rule would prohibit the transfer of credits to another entity unless all of the assets of the taxable entity are conveyed, assigned, or transferred in the same transaction.

Utah: On February 11, 2015, the Utah Governor’s Office of Economic Development proposed to update a refundable economic development tax credit rule to reflect historic practices and provide a more comprehensive outline to the processes and procedures used in administering and awarding the tax incentive. The rule outlines how a tax incentive is granted including the criteria used in screening applicants and how the tax credit is calculated and redeemed. The rule defines key terms, provides for the application process, and provides the factors to be considered in authorizing an economic development tax increment financing (EDTIF) award. The new rule also outlines the application for and verification of information supporting an annual EDTIF payment, and how to request a modification of the EDTIF offer or contract.

Virginia: On February 9, 2015, the Virginia Senate passed legislation (SB 1447) designed to attract investments from companies that used inversions to reduce their federal tax liabilities. If passed by the House of Delegates, SB 1447 would amend the state’s corporate income tax statute to permit a $5 million exemption for companies that used an inversion transaction to lower their U.S. tax liability and that make a capital investment of at least $5 million in Virginia to open a facility or other business operation.

Case Law Update

Georgia: In LT IT-2014-03, the Georgia Department of Revenue ruled that after a company converts to a limited liability company, it can continue to claim benefits awarded to the original company under the quality jobs tax credit program, including income tax carryforwards, withholding benefit carryforwards, and remaining credit installments.

European Union v. Washington: On February 23, 2015, the World Trade Organization (“WTO”) agreed to consider a European Union (“EU”) complaint against Washington over the state’s $8.7 billion package of tax incentives approved in 2013 (SB 5292) to encourage Boeing to manufacture its 777X in the state. SB 5952 included reduced business and occupation tax rates for aerospace suppliers, a sales tax exemption for materials used in the construction of aerospace manufacturing facilities, and tax breaks for property associated with those facilities.

The EU submitted a complaint to the WTO in December 2015, saying the incentives granted by Washington to Boeing violated the WTO’s Agreement on Subsidies and Countervailing Measures (SCM agreement) which bans subsidies that are contingent on the use of domestic goods. Specifically, the allegation is linked to two sections of SB 5952 that connected the incentives to the “siting of a significant commercial airplane manufacturing program in the state of Washington.” While most of the incentives simply required that such a siting occur, RCW 82.04.260(11)(e)(ii) revokes the preferential business and occupation tax rates if Boeing relocates the 777X outside Washington.

The complaint is only the latest chapter in a saga dating back to a 2004 complaint by the United States over subsidies offered to France-based Airbus, a major competitor to Boeing in the manufacture of commercial aircraft. That complaint was countered with a complaint over U.S. subsidies to Boeing. Both companies were eventually found to have received illegal subsidies, and in 2012, the WTO ruled that a variety of state and federal subsidies to Boeing violated the SCM agreement and harmed EU interests by undercutting Airbus.

States’ Evaluation and Review of Credit and Incentive Programs

Maryland: On February 12, 2015, An economic development task force appointed by Maryland lawmakers released a report with recommendations to improve the state’s business climate that include restructuring the state’s economic development programs and business tax incentives for better program efficacy.

New York: According to a February 5, 2015, report released by New York State Comptroller Thomas DiNapoli, it is unclear whether the $1.3 billion in incentives and credits given out annually by New York is creating jobs. The report focuses on the Empire State Development Corp. (ESDC) use of tax incentives, accountability and transparency in ESDC operations, and how improvements can be made.

The Task Force on Evaluating Economic Development Tax Expenditures, comprising New York City Council members and leaders from business, labor, policy, and academic communities, is reviewing New York City’s billions of dollars in economic development tax incentives to make sure the money is being put to good use. The Task Force began meeting at the end of January 2015 and has held two meetings to date. The Task Force is expected to deliver a report on its findings by the end of 2015 to the State Legislature. The Legislature’s review is needed for final approval before the city can change any laws.

North Carolina: In response to North Carolina Republican Gov. Pat McCrory’s proposal to expand the Job Development Incentive Grants program (“Program”), the North Carolina Justice Center reported that since its inception in 2002, more than half of all firms receiving incentive awards from the Program have failed to live up to their promises of job creation, investment, or wages.  Given this report, it will be interesting if the Governor’s proposal will have any legs to stand on.


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