The National Law Forum

The Blog of the The National Law Review

January 2016 Tax Credits & Incentives Update

tax man liftingwiderHMB Tip of the Month:  As provided in two of the cases highlighted in this monthly update, a taxpayer that meets all of the criteria of a statutory tax credit (in which funding is available) may be successful in court when it faces a challenge to its eligibility to the credit from the jurisdiction that administers the credit.  If a taxpayer faces such a challenge and the denial of the credit is material to the taxpayer, a taxpayer should explore its options with a trusted consultant.

Recent Announcements of Credit/Incentives Applications and Packages

Massachusetts– Global business giant General Electric Co. announced January 13 that it is relocating its corporate headquarters from Connecticut to Massachusetts as part of a deal that includes a $145 million state and local tax incentive package.  GE will begin relocating its Fairfield, Connecticut, corporate headquarters to Boston this summer and expects to complete the move by 2018.

Connecticut’s Governor Malloy offered an incentive package to GE in August 2015, but it apparently was not enough to persuade the company to stay.  The move will bring 800 jobs to Boston, specifically to the Seaport District.  Massachusetts offered up to $120 million through state grants and other programs, and the city offered up to $25 million in property tax relief.

Additional incentives include $1 million in grants for workforce training; up to $5 million for an innovation center to forge connections between GE, research institutions, and the higher education community; commitment to existing local transportation improvements in the Seaport District; appointment of a joint relocation team to ease the transition for employees moving to Boston; and assistance for eligible employees looking to buy homes in Boston.

Legislative, Regulative and Gubernatorial Update

Alaska- Alaska Governor Walker released legislation (HB 246 and HB 247) on January 19 detailing his proposal to end many of the state’s oil tax credits and establish a low-interest loan program to support exploration and production.  Jerry Burnett, deputy commissioner of the Alaska Department of Revenue, said current oil prices and production levels have forced a reconsideration of how the state encourages oil industry investment. “We can end up paying 55 to 65 percent of the project during development and 85 percent of exploration [costs],” he said. “It’s a fairly generous program. It seemed like a good idea when oil was $100 a barrel.”  With oil prices currently at around $27 per barrel, the Walker administration wants to pivot away from tax credits — many of which the state repurchases from companies — and instead focus on creating a loan program to back companies developing petroleum resources.

Illinois–   Several bills were introduced in the Illinois House on January 27.

HB 4545 creates the Manufacturing Job Destination Tax Credit Act and amends the Illinois Income Tax Act. It provides for a credit of 25% of the Illinois labor expenditures made by a manufacturing company in order to foster job creation and retention in Illinois. The Department of Revenue is authorized to award a tax credit to taxpayer-employers who apply for the credit and meet the certain Illinois labor expenditure requirements. The bill sets minimum requirements and procedures for certifying a taxpayer as an “accredited manufacturer” and for awarding the credit.

HB 4544 would amend the Illinois Income Tax Act to authorize a credit to taxpayers for 10% of stipends or salaries paid to qualified college interns. The credit is limited to stipends and salaries paid to 5 interns each year, and limits total credits to $3,000 for all years combined. The bill provides that the credit may not reduce the taxpayer’s liability to less than zero and may not be carried forward or back.

Finally, HB 4546 would amend the Service Occupation Tax Act and the Retailers’ Occupation Tax Act to provide that, by March 1, 2017, and by March 1 of each year thereafter, each business located in an enterprise zone may apply with the Department of Commerce and Economic Opportunity for a rebate in an amount not to exceed 1% of the amount of tax paid by the business under the Acts during the previous calendar year for the purchase of tangible personal property from a retailer or serviceman located in Illinois. The legislation provides that the Department of Commerce and Economic Opportunity shall pay the rebates from moneys appropriated for that purpose.

Indiana– SB 125 introduced on January 5 would resurrect a program that has struggled to maintain political support since it was proposed in 2005. The bill would allow a refundable credit for qualified in-state production expenditures of at least $50,000. The program would be open to producers of films, television programs, audio recordings and music videos, advertisements, and other media for marketing or commercial use. It excludes obscene content and television coverage of news and athletic events.

For expenditures of less than $6 million, the credit would be equal to 35 percent of those expenses, or 40 percent of expenditures in an economically distressed location. For qualified production expenditures of at least $6 million, the Indiana Economic Development Corporation would be tasked with setting the credit level, which could not exceed 15 percent. Those credits would also need to be preapproved by the agency.

The bill takes a broad approach to defining expenditures but excludes wages, salaries, and benefits paid to directors, producers, screenwriters, and actors who do not live in Indiana. The program would be capped at $2.5 million annually and sunset at the end of 2019. It also includes clawback provisions preventing taxpayers from claiming unused credits and requiring them to repay any credits that have already been claimed if they fail to satisfy the bill’s conditions.

Maryland- On January 27, Maryland Governor Hogan proposed a series of education-focused legislative proposals including an education tax credit. The proposed tax credit would be provided to private citizens, businesses, and nonprofits that make donations to public and non-public schools to support basic education needs such as books, supplies, technology, academic tutoring, tuition assistance, and special needs services. The credit would also target the promotion of pre-K programs and enrollment. The credit would be awarded through the Department of Commerce with the total level of credits phased in over three years to $15 million in fiscal year 2018.

Massachusetts– On January 27, Massachusetts Governor introduced legislation (H 3978) which would restore the film tax credit to the structure when the credit was introduced in 2005 and use the revenue generated to increase the annual cap on the low-income housing tax credit by $5 million, and to phase-in over four years the use of single-factor apportionment for all corporate taxpayers who do business in more than one state.

New Jersey– Governor Christie conditionally vetoed on January 11 two Senate bills that would have renewed the recently expired film tax credit program.  The vetoed Senate bills, S 779 and S 1952, would have renewed the recently expired film tax credit program, funding the program at $60 million annually for seven years.  The film tax credit program that expired in 2015 allowed production companies to claim up to a 20 percent tax credit on expenses.

In his veto message, Christie called the bills expensive and said they offer “a dubious return for the State in the form of jobs and economic impact, and that I believe we should consider, if at all, during the upcoming budget negotiation process.”

Senate Democrats issued a joint statement claiming that Christie supports tax credits for big companies “but when it comes to an industry that helps small local businesses he looks the other way.” The senators said that by not reauthorizing the film tax credit program, Christie is starving the film industry in New Jersey and making the state uncompetitive with neighboring states.

New Jersey– L. 2016, S2880, effective 01/19/2016, provides up to $25 million in Economic Redevelopment and Growth Grant (ERG) tax credits to Rutgers, the State University of New Jersey, for eligible projects including buildings and structures, open space with improvements, and transportation facilities. The law also raises the ERG program cap from $600 million to $625 million.

New Jersey– L. 2016, S3182, effective 01/19/2016, permits a 2-year extension for a developer of a “qualified residential project” or “qualified business facility” to submit documentation to the New Jersey Economic Development Authority supporting its credit amount under the Urban Transit Hub Tax Credit program. The law also provides an additional two years for developers to submit information on the credit amount certified for any tax period, the failure of which subjects the amount to forfeiture. In addition, the law permits a one-year extension for a developer of a qualified residential project to submit documentation of having received a temporary certificate of occupancy to receive tax credits under the Economic Redevelopment and Growth Grant program. The deadline for a business to submit documentation that it met the capital investment and employment requirements under the Grow New Jersey Assistance Program (for a credit applications made before July 1, 2014), is extended to July 28, 2018.

New Jersey– L. 2016, S3232, effective 01/11/2016, allows certain businesses that have previously been approved for a grant under the Business Employment Incentive Program (BEIP) to direct the New Jersey Economic Development Authority to convert the grant to a tax credit. The law provides an alternative means to satisfy the backlog of unpaid grant obligations, approved before the phase out of the BEIP, due to fiscal constraints. Requests to convert grants to tax credits must be made within 180 days of the law’s enactment. The law also establishes a priority for issuing the tax credits favoring older outstanding grant obligations.

Virginia– The Virginia Department of Historic Resources has amended regulations 17 VAC §§ 10‐30‐10 through 10‐30‐160, effective February 10, 2016. The numerous amendments relating to the historic rehabilitation tax credit include the requirement to provide certain information on the “Evaluation of Significance” on the Historic Preservation Certification Application. The requirement for an independent audit reporting and review procedures is increased to $500,000 or greater, and for projects with rehabilitation expenses of less than $500,000 an agreed upon procedures engagement report by an independent accountant must be used. The fee structure for processing rehabilitation certification requests has been revised, and the fees charged by the Department for reviewing rehabilitation certification requests have also been increased. The entitlement to the credit has been changed from January 1, 1997 to January 1, 2003; consequently, the section on projects begun before 1997 has been updated to reflect the new 2003 date. The amendments also added or modified certain definitions.

Washington– With the backing of unions, HB 2638 was introduced on January 18 which would require Boeing to keep its in-state employment levels near a 2013 baseline for the company to claim the full value of a reduced business and occupation (B&O) tax rate and the B&O tax credit for aerospace product expenditures.

The legislation, similar to the failed HB 2147 from 2015, is a reaction to what labor and other critics say is the loss of thousands of Boeing jobs in Washington since lawmakers in 2013 extended the aerospace industry tax incentives from 2024 to 2040.

HB 2147 was reintroduced in this session, but HB 2638 is the proposal proponents intend to pursue this year. HB 2638 would set a baseline of 83,295 in-state employees, roughly the same as the company’s 2013 Washington workforce. After Boeing’s workforce falls 4,000 below that level — which has already happened — the value of the tax incentives would be cut in half. If Boeing’s workforce falls to 5,000 fewer than the baseline, the company would pay normal B&O tax rates and lose the ability to claim the tax credit.  HB 2638 is less incremental than HB 2147, which would have increased the B&O tax rate closer to normal by 2.5 percent for every 250 employees below the baseline.

Case Law

California– In a case in which Ryan U.S. Tax Services, LLC (Ryan), a tax advisory and site selection firm, challenged the validity of a regulation concerning contingent fee practitioners advising taxpayers who submit applications for the California Competes Tax Credit, the California Superior Court, Sacramento County, has said that it will grant Ryan’s petition and request for declaratory relief. Cal. Rev. & Tax. Cd. § 17059.2 and Cal. Rev. & Tax. Cd. § 23689 (sometimes hereinafter referred to as the statutes) each set forth 11 factors on which the Governor’s Office of Business and Economic Development (GO-Biz) is to allocate the credit.  GO-Biz also adopted regulations to implement the credit program, including the application process for tax credit allocation. Cal. Code Regs. 10 § 8030(b)(10) requires applicants for tax credits to provide certain information on the tax form, including the name of any consultant providing services related to the credit application, the consultant’s fee structure and cost of services, and whether payment to the consultant is influenced by whether a credit is awarded.

Moreover, Cal. Code Regs. 10 § 8030(g)(2)(H) provides that GO-Biz will evaluate any other information requested in the application, including but not limited to the reasonableness of the fee arrangement between the applicant and any consultant and it further provides that any contingent fee arrangement must result in a fee that is no more than a reasonable hourly rate for services. Ryan contended, among other things, that the regulation is inconsistent with the statutes because it expands the qualifications for tax credit applicants, that is, it adds to the exclusive list of 11 qualifying factors in the statutes a new factor, the amount of consultant fees paid by tax credit applicants. GO-Biz argued that the legislature delegated to it broad authority to fill in the details of the tax credit program, and while the statutes do not explicitly list consultant fees as a consideration, they fall within the scope of the factor that authorizes GO-Biz to consider the extent to which the anticipated tax benefit to the state exceeds the projected benefit to the taxpayer from the tax credit (Cal. Rev. & Tax. Cd. § 17059.2(a)(2)(K); Cal. Rev. & Tax. Cd. § 23689(a)(2)(K)) by ensuring that tax credits are used for job creation and are not unnecessarily diverted to unreasonable consultant fees.

The court agreed with Ryan that the regulation was invalid. Limiting consultant fees does not preserve tax credits or ensure that tax credits will be used to create new, good-paying jobs. The statutes provide the 11 factors to be used in allocating credits. The cost of a consultant’s services is a matter between the taxpayer and the consultant. Even if the statutes are construed as allowing GO-Biz to consider whether consultant fee arrangements are reasonable, the court found that the regulation’s de facto ban on contingent fee arrangements to be arbitrary and not reasonably necessary to carry out the purposes of the statutes because it effectively disqualifies businesses that have contingent fee arrangements with their consultants from receiving the credit. The court will enter judgment in the case after a formal judgment is prepared, approved, and signed. (Ryan U.S. Tax Services, LLC v. State of California, Cal. Super. Ct. (Sacramento County), Dkt. No. 34-2014-00167988, 01/07/2016.)

Kansas– The Kansas Department of Revenue ruled that a third party cannot furnish electric service or enter into a solar power purchase agreement (PPA) with a Kansas homeowner, as the Retail Electric Suppliers Act (RESA) prohibits the furnishing of electric service by any person or company other than the certified public utility for a particular territory, and so it was moot whether the charges a non-utility billed to a Kansas customer were taxable. The Department declined to speculate about the potential answer should the Kansas Legislature sometime authorize non-utilities to enter into PPAs, but the company was encouraged to resubmit the question if it is not directly answered by the legislation should such PPA agreements be legalized. (Kansas Opinion Letter No. O-2016-001, , 01/25/2016 .)

Kentucky– The U.S. District Court for the Eastern District of Kentucky has ruled that a Noah’s Ark-themed tourist attraction cannot be denied sales tax incentives by Kentucky on grounds that the project advanced religion in violation of First Amendment protection from state establishment of religion. The Court found that the religious-based theme park met the neutral criteria for the tax incentives and, therefore, the state could not deny the incentives for Establishment Clause reasons. In addition, in denying the tax incentives, the state violated the Free Exercise Clause of the First Amendment. Consequently, the Court enjoined the state of Kentucky and its Tourism, Arts, and Heritage Cabinet from applying the Tourism Development Act in a way that excludes Ark Encounter from the program based on its religious purpose and message or based on its desire to utilize any exception in Title VII of the Civil Rights Act for which it qualifies concerning the hiring of its personnel.Ark Encounter, LLC, et al. v. Parkinson, et al., U.S. Dist. Ct. (E.D. KY), Dkt. No. 15-13-GFVT, 01/25/2016.

© Horwood Marcus & Berk Chartered 2016. All Rights Reserved.

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