This is the first in a monthly series outlining updates in state tax credits and incentives, including but not limited to legislative, gubernatorial and case law updates as well as recent announcements of credit/incentives packages. While we recognize that tax credits and incentives are often frowned upon by tax policy experts, they are seen as necessary by state and local governments. Why? The reason is simple -- state and local governments are focused on creating jobs and encouraging investment within their borders, and they must compete with surrounding states for those jobs and investment, most of which also offer tax credits and incentives. 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 Packages
A review of recent package announcements shows the breadth of the potential packages available to a large variety of companies for investing in the state, creating new jobs and in some cases, simply retaining jobs.
California: On January 15, 2015, the California Governor's Office of Business and Economic Development (GO-Biz) announced that pursuant to its new California Competes Tax Credit Program it approved approximately $31 million in tax credits for 56 companies projected to create roughly 4,900 jobs and generate over $900 million in investment in the state. One company involved is Neustar, Inc. which provides cloud-based information and data information services. Over the course of 5 years, the company is expected to create 264 full-time jobs and invest $2.5M in the state. The total tax credits allocated over the course of 5 years is $1.5M.
Connecticut: Connecticut announced in December 2014 that local municipal and tax-exempt organizations will collect more than $5.8 million for community projects as a result of the state's Neighborhood Assistance Act Tax Credit Program. Each year, up to $5 million in corporate income tax credits are available to businesses that make donations to community agencies and programs identified by municipalities. Businesses can apply for the credit after pledging donations for endeavors that include community service, food banks, energy assistance, literacy, and programs for people with special needs.
Kentucky: Gov. Steve Beshear on January 12, 2015, announced the opening of the global headquarters of food processing developer Avure Technologies Inc. in northern Kentucky. The company was approved for tax incentives of up to $300,000 through the state's business investment program and is expected to create 16 jobs and invest $3 million in the state.
Maryland: Gov. Martin O'Malley announced in December 2014 that $10 million in state tax credits will fund 9 historic restoration projects across the state, leveraging private investment of nearly $76.7 million as part of the Sustainable Communities Tax Credit program administered by the state planning department's Maryland Historical Trust. One such project involves Taylor's Furniture Store which will rehabilitate a retail and residential building for use as restaurant and office space. The credit amount is $150,000 and the estimated project cost is $750,000.
Massachusetts: In December 2014, the Massachusetts Economic Assistance Coordinating Council announced the approval of 18 business projects for the state's Economic Development Investment Program, the state's investment tax credit program for businesses. The projects are expected to create nearly 1,700 new jobs, retain about 4,500 existing jobs, and leverage over $342 million in private investment and supporting construction projects. One credit award winner is Golden Fleece Manufacturing Group LLC, doing business as Southwick/Brooks Brothers Group Inc., which plans to expand its site, boost the number of suits it produces, retain 468 full-time jobs, and create 70 new full-time jobs. The business will invest $16 million in renovation and other costs; and the city of Haverhill will provide a 20-year tax increment financing and personal property tax exemption agreement valued at about $4.4 million.
Michigan: In a January 14, 2015, press release, the Michigan Economic Development Corporation announced the expansion of Android Industries in Detroit; the company was approved by the city council for an industrial facilities tax exemption valued at $620,000 and is projected to generate $16.5 million in new private investment and to create 131 jobs.
In a January 27, 2015, news release, the Michigan Economic Development Corporation announced the Michigan Strategic Fund approved a local hotel development project and expansions of Forest River Manufacturing and Toyota in the state; the projects are expected to generate investment of $90.1 million and will receive grants and property tax abatements.
Ohio: On January 26, 2015, Governor John R. Kasich announced the approval of assistance for 14 economic development projects set to create 662 jobs and retain 1,739 jobs statewide. Collectively, the projects are expected to result in $32,570,620 in new payroll, and spur approximately $81.8 million in investment across Ohio. One company that was approved for assistance is Metcut Research Associates Inc. and Cincinnati Testing Laboratories, Inc. who is expected to create 15 full-time positions, generating $875,000 in additional annual payroll and retaining $10 million in existing payroll as a result of the companies' expansion projects in the cities of Cincinnati and Forest Park. Metcut Research Inc. and its subsidiary Cincinnati Testing Laboratories conduct independent materials engineering and testing. Ohio approved a 35% five-year Job Creation Tax Credit for this project.
States' Evaluation and Review of Credit and Incentive Programs
Multiple Jurisdictions: According to research published on January 21, 2015, by Pew Charitable Trusts, ten states and the District of Columbia have in the last 2 years enacted or strengthened laws requiring them to evaluate the effectiveness of their tax incentives. The ten states identified by Pew Charitable Trusts are Alaska, Florida, Indiana, Louisiana, Maryland, Mississippi, New Hampshire, Oregon, Rhode Island, and Washington. For further information, see http://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2015/01/tax-incentive-programs.
Continuing the trend from the last 2 years, in recent months, several different states proposed or announced plans to review their credit and incentive programs:
California: SB 1335 (approved by the Governor in September 2014 and chaptered "845") requires that any legislation proposing an income tax credit detail the goals of such a credit and provide performance indicators with which to measure its success.
Georgia: On January 26, 2015, a dozen Georgia Democratic senators introduced SR 65 that would create a tax exemption study committee to examine the effectiveness of economic development tax credits in the state.
Nebraska: In a report issued on December 11, 2014, a Nebraska legislative committee (Unicameral Legislature's Tax Incentive Evaluation Committee) recommended that the state overhaul its system for evaluating its tax incentive programs, specifically recommending that the Legislative Audit Office, assisted by the Legislative Fiscal Office, evaluate the state's incentive programs every three years. Currently, Nebraska has no formalized process for evaluating tax incentives.
New Mexico: On January 14, 2015, the New Mexico state auditor announced his plan for a new government accountability office that will evaluate how equitably and effectively the state uses its tax dollars, including assessing the value of the state's tax incentive programs.
Washington: HB 1239, introduced on January 15, 2015, in the Washington Legislature, would require more accountability for tax expenditures by requiring that they be reviewed for renewal or sunset as part of the biennial omnibus appropriations bill.
Legislative and Gubernatorial Update
Iowa: Gov. Terry Branstad, in his January 16, 2015, inaugural address, called for an angel investor tax credit to foster innovation and the growth of start-up companies.
Maryland: On January 22, 2015, Gov. Larry Hogan announced his $16.4 billion budget for fiscal 2016, including $12 million in biotechnology tax credits, $9.4 million to stem cell technology, and $2.5 million in investments and tax credits to promote cyber security research.
New Mexico: In her January 20 State of the State address, New Mexico Gov. Susana Martinez proposed targeted tax relief to reduce the personal income tax burden on small business owners who are just starting out and hiring new employees, incentives for moving headquarters to the state, and a $50 million closing fund for economic development projects.
Rhode Island: Rep. Joseph Shekarchi reintroduced on January 15, 2015, a bipartisan bill (H 5116) that would offer businesses that create new jobs in the state a reduction in their income tax rates. The Rhode Island New Qualified Jobs Incentive Act would offer tax incentives to companies that hire new full-time employees to work a minimum of 30 hours per week, with an annual salary between $35,100 and $46,800. Larger companies would be eligible for a 0.25% reduction in their net income tax rate for every 50 new hires. Smaller companies, defined as those with fewer than 100 employees, would receive a 0.25% reduction in their personal income tax rate for every 10 new hires.
Virginia: On January 23, 2015, SB 1447 was introduced in the Virginia Senate aimed to attract investments from companies that used inversions to reduce their federal tax liabilities. Specifically the bill 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. The exemption would be available beginning in tax year 2016 for qualifying companies that make a $5 million capital investment in Virginia to open a facility or other business operation, and it would be valid for the first five years of the facility's or business's operation.
Case Law Update
Illinois: On January 9, 2015, the Illinois Policy Institute filed a lawsuit in Sangamon County Circuit Court alleging that businesses should receive tax credits under the Edge Development for a Growing Economy (EDGE) program only if they create new jobs in the state, not if they retain them (Docket No. 2015-MR-000016). See https://d2dv7hze646xr.cloudfront.net/wp-content/uploads/2015/01/EDGE-2015.01.08-Motion-for-Preliminary-Injunction.pdf.
The EDGE program (35 ILCS 10/5-1 et seq) offers incentives to encourage companies to locate or expand their operations in the state when there is active consideration of a competing location in another state. If the business is eligible, the program provides tax credits equal to the amount of state income taxes withheld from the salaries of newly hired employees. In addition to locating or expanding in the state, businesses must agree to make an investment of $5 million in capital improvements and to create a minimum of 25 new full-time jobs. Small businesses, defined as those with 100 or fewer employees, must agree to make a capital investment of $1 million and create at least five new full-time jobs in the state.
The Illinois Department of Commerce and Economic Opportunity (DECO) adopted a regulation, 14 Ill. Admin. Code § 527.20, which awards tax credits when businesses retain jobs, not create them. The Chicago Tribune reported that since 1999, the state has awarded nearly $1 billion in tax incentives to businesses under the EDGE program, the bulk of which was for jobs retained.
New York: In a decision dated January 15, 2015, a New York Division of Tax Appeals administrative law judge (ALJ) determined that the tax department properly denied qualified empire zone enterprise refundable tax credits to two limited liability companies because the companies, by shifting employees from one LLC to another, failed to meet the employment requirement. DTA Nos. 824986; 824987; 824988; 824989; Matter of Leeds.
In this case, one of the entities was certified as a qualified empire zone enterprise (QEZE) in 2000, but did not seek benefits until 2006 and 2007. In 2002, the statute was amended to include an employment test which restricted the use of individuals from related persons in calculating the employment numbers in taxable years or base period. For both 2006 and 2007, the parties do not dispute that one of the entities used an employee who had been previously employed by a related party.
The petitioners argued that since QEZE certification was granted for a period of 15 years, they had the right to rely on the statutory language in effect as of date of certification as a QEZE and continuing until that certification expired.
The ALJ found that one of the entity's QEZE eligibility merely made it eligible to receive the tax benefits, including real property tax credits. The entity's entitlement to benefits had nothing to do with the administration of the Empire Zone program or the Legislature's prerogative to modify the requirements for obtaining those benefits on a prospective basis.
Finally, you can thank the Seth Rogen and James Franco controversial movie,The Interview, for these interesting tidbits. The recent hacking of Sony Pictures Entertainment resulted in the public release of large amounts of data about the company's tax practices which show that studio executives at the highest levels are constantly tracking changes in the availability and use of film incentives. For instance, the materials show that the developers of a project often feel compelled to explain how the project can be located in a jurisdiction with favorable incentives, sometimes even before it is considered for production.
For instance, when producers wanted to revive a Vatican-themed television series that was rejected the year before, they recommended shooting at a location in London where a "highly favorable tax credit" could help bring the project's budget into an acceptable range.
In addition, (1) in a series of e-mails, studio executives push for changes to a James Bond script that would maximize their eligibility for tax credits from Mexico; (2) an e-mail about an upcoming Steve Jobs biopic shows how tax-driven location decisions can be affected by casting decisions; and (3) a film about former National Security Agency contractor Edward Snowden was rejected after the French, German, and New York City incentives recommended by its developers failed to bring its budget down far enough.