This post continues a monthly series outlining updates in state tax credits and incentives; included here are legislative, gubernatorial and case law updates. While tax credits and incentives have their fair share of critics, they are a reality in today's competitive business environment in which states compete with each other for jobs and investment. Regardless of the criticisms, state tax credits and incentives benefit many kinds of entities in a number of different ways.
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When considering statutory tax credits and incentives, it is important to consider that many states require pre-certification of eligibility, as well as location in a specific geographic area. Factors that affect eligibility or delivery of the benefit may include the current funding level of the program, preferences or set-asides for certain types of projects or activities, the timing of funding cycles set up by the jurisdiction, local political issues, and other external factors. Currently over 50% of statutory tax credits require pre-approval, and more states are requiring pre-certification or pre-approvals for participating in tax credit programs. The reason being is that more states are closely monitoring their tax credit and incentive programs.
Recent Announcements of Credit/Incentives Applications and Packages
California - The city council of Anaheim, California, on July 8, renewed a tax agreement with Walt Disney Co. that promises not to impose a gate tax on Disneyland for another 30 years. The agreement is contingent on a planned investment by Disney of over $1 billion by 2024. A commitment by the company to make an additional $500 million investment by the end of 2045 would extend the agreement for another 15 years. Under the agreement, the city would provide Disney an incentive payment to compensate for an entertainment tax if the city ever enacts one. The city is not considering an entertainment tax at present. According to Anaheim, the park generates $147.8 million in annual tax revenue, which more than pays for city services and provides roughly $67 million in surplus funds for the city.
Illinois - About one month ago, on May 31, 2015, Governor Rauner announced the immediate suspension of all future business attraction and retention incentives, the deferring of film tax credit and high impact business designation approvals, and other administrative measures to cut spending as a result of the state's nearly $4 billion budget deficit for fiscal 2016.
Despite Rauner's announcement and after some behind the door negotiations, it appears that "Chicago Med" got the tax credit green light. "Chicago Med," a medical drama, is the third network TV show by mega-producer Dick Wolf. It is a follow-up to "Chicago Fire" and "Chicago P.D.," which film at Cinespace Chicago Film Studios on Chicago's West Side. The tax credit covers up to 30% of eligible in-state spending on a project. Officials claim the tax credit has spurred hundreds of millions of dollars in economic activity.
Louisiana - On July 28, 2015, the Louisiana Governor′s Office announced that the Florida Fuel Connection LLC will make a $75 million capital investment in Louisiana and build a petroleum terminal and rail transportation facility in East Feliciana Parish, near the Mississippi River. The Louisiana Economic Development began discussing the project with the company in January 2015. To secure the venture, the state offered an incentive package that includes Enterprise Zone benefits, such as a tax credit of $2,500 per qualifying new permanent full-time job created and either a tax credit on qualified capital expenditures or a rebate of state sales taxes paid on construction materials used exclusively on site during construction.
New Jersey - JPMorgan Chase Bank NA won the New Jersey Economic Development Authority's approval in July for more than $187 million in tax credits for the potential relocation of 2,150 positions to an expanded campus in Jersey City. The agency estimated that the current project would provide the state with a net benefit of more than $666 million over 20 years, but opponents have argued that the bank does not need a subsidy from the state.
New Jersey's Grow New Jersey Assistance Program also approved more than $26 million in tax incentives to entice Jaguar Land Rover North America LLC to keep its North American headquarters in Mahwah, New Jersey, With the Land Rover project, the state is looking to retain 252 full-time positions and create 61 new jobs by convincing the company to relocate to an approximately 147,000-square-foot facility in Mahwah as opposed to another site in Pearl River, New York. The EDA estimates that the project would provide the state with a net benefit of $111 million over 20 years.
Moreover, New Jersey's Grow New Jersey Assistance Program approved $40 million in incentives for a new residential tower in downtown Jersey City. KRE Hamilton Urban Renewal LLC would use the $40 million in tax credits that the EDA board approved under its Economic Redevelopment and Growth Grant Program to help construct a 17-story, 397-unit apartment on Marin Avenue in Jersey City. The project in the city's Hamilton Park neighborhood has a total estimated cost of more than $163 million.
Texas - On July 7, the Texas comptroller of public accounts issued a private letter ruling (PLR) tentatively approving a large-scale data center construction project for a 20-year sales tax exemption, likely paving the way for a new Facebook data processing facility. The taxpayer that requested the ruling is a wholly owned subsidiary of a publicly traded company planning to initially build a 250,000-square-foot complex to house networked computers, data and transaction processing equipment, and other related infrastructure.
While the PLR did not provide the identity of the taxpayer, Facebook also announced July 7 that Fort Worth would be the home for a new data center, which it described as "one of the most advanced, efficient, and sustainable data centers in the world" completely powered by renewable energy. According to the PLR, the project will involve a $500 million capital investment over five years and create at least 40 new full-time jobs.
When operational, the data center will provide, at arm's-length rates, data hosting services to its parent company, including hosting websites, applications, and systems that facilitate the sharing of data between end-users, and the sale, development, and delivery of content and any related processes or technology that relates to facilitating communication among end-users and serving advertisements.
The taxpayer requested that the comptroller verify that the project would satisfy the Texas Tax Code's qualification requirements for a 20-year sales tax exemption for large data center projects before it filed an application to certify its status as a qualified owner, operator, and occupant of the proposed center.
Legislative, Regulative and Gubernatorial Update
Hawaii - The Governor recently approved a law that permits utilities and third parties to own or operate a community-based renewable project. The predominant renewable energy sources are likely to be solar and wind energy. The details of Hawaii's community renewable energy program will be filled in through the filing - by no later than Oct. 1, 2015 - of tariffs by electric utilities, to be reviewed and approved, if in the public interest, by the Hawaii Public Utilities Commission (HPUC). Also enacted was a bill establishing a goal that renewable energy serve as 100% of Hawaii's power supply by 2045. Hawaii is the first state to set a renewable portfolio standard at the 100% level.
Kansas - In Notice 15-04, the Kansas Department of Revenue provides a motor fuel legislative update, announcing the enactment of SB 112, which disallows the Kansas retail dealer incentive for renewable fuels and biodiesel because the incentive remains unfunded through June 30, 2018.
Louisiana - In Revenue Information Bulletin No. 15-030, the Louisiana Department of Revenue announced that beginning August 1, 2015, sales tax rebate requests for the enterprise zone and quality jobs incentive programs must be submitted electronically unless permission has been granted to submit the request in an alternate form.
Michigan - Michigan HB 4122, signed into law as Public Act 117, prohibits the Michigan Film Office and Strategic Fund from funding production expenditures under a new agreement or increasing funding under an existing agreement and requires the balance of the state's film promotion cash rebate program to revert to the general fund after September 30, 2016.
New Hampshire - New Hampshire Governor on July 20, vetoed a bill that would have rewarded a tax break to Planet Fitness to keep the company's headquarters and some 200 employees from leaving the state. Governor Hassan objected to the last-minute nature of HB 550, while also suggesting she might still be open to a different version when lawmakers reconvene to consider the biennial budget she vetoed earlier. The state is currently operating under a six-month continuing resolution that expires January 1, 2016.
The issue arose because of a provision that shares in the national fitness franchise, with 900 gyms across the country, would be taxable under the Business Profits Tax (BPT) under existing law. It has filed with the SEC for an initial public offering. HB 550 would carve out an exemption for such transactions.
Oregon - On July 20, 2015, the Governor signed an omnibus bill (H.B. 2171) extending several tax credits while prohibiting credits from being used to offset the state's corporation minimum tax. H.B. 2171 imposes a six-year suspension on the use of tax credits to satisfy the minimum tax liability, which increases the tax liability of many corporations. The new law applies to tax years beginning on or after January 1, 2015, and before January 1, 2021.
Corporations that included available credits to compute their Oregon tax liability in making estimated tax payments for tax years beginning on or after January 1, 2015, may now be underpaid. HB 2171 doesn't include a waiver or abatement of any interest on the consequent underpayment of estimated tax. Tax credits may again be used to satisfy the minimum tax liability for tax years beginning on or after January 1, 2021. Oregon law, however, limits carryover periods for many credits. HB 2171 restricts the use of these credits but doesn't provide for an extension of the carryover period.
The declaration that tax credits may not be used to offset the Corporation Minimum Tax reverses a 2013 Oregon Supreme Court ruling (Con-Way Inc. v. Dep't of Revenue, Or. Sup. Ct., No. SC S060141, 5/31/2013) and will generate $19.2 million in revenues for the state in the 2015-17 biennium, according to the Legislative Revenue Office. It also moved up the sunset date for a long-term care insurance credit to 2015. The credit would have expired in 2016. That change will increase state revenues by $10.4 million in the 2015-17 biennium.
Rhode Island - In Notice 2015-10, the Rhode Island Division of Taxation informed tax credit and incentive recipients of disclosure requirements, including filing a Disclosure Form TC-100, due August 15, and an Annual Employee Report, due September 1.
States' Evaluation and Review of Credit and Incentive Programs
Maine - Maine LD 941, enacted as Chapter 344, requires the state to evaluate tax expenditures beginning in 2016, establishes the processes for review and evaluation, requires public hearings on expenditures as part of the budget process, and allows the disclosure of information needed for the evaluations.
New Jersey - On June 29, 2015, a New Jersey Assembly member, Troy Singleton, introduced A 4640, which is his second attempt to secure enhanced transparency for the state's economic development tax incentive programs after his first attempt for enhanced oversight was vetoed in May. The bill would require enhanced review and public reporting of incentive grants and would bar companies that used inversions to reduce their federal tax liabilities from securing state tax incentives. Under the bill, the New Jersey Economic Development Authority (EDA) would be required to submit to lawmakers and publish online a report providing a review and analysis of New Jersey's business incentive programs.
California - Ryan U.S. Tax Services LLC v. California (Cal. Super. Ct.2015) - A California Superior Court judge has postponed a hearing on Ryan U.S. Tax Services LLC's request to block regulations issued by the Governor's Office of Business and Economic Development (GO-Biz) requiring applicants to disclose and limit contingency fee arrangements from Aug. 7 to Jan. 8, 2016, because of a "severely congested calendar." While Ryan and GO-Biz await a court hearing, the office has announced it will award $200 million in California Competes credits through three rounds of applications for the fiscal year that began July 1.
Ryan is arguing in its lawsuit that GO-Biz exceeded its authority when it inserted the contingency fee restrictions into regulations for the program. In an opening brief filed June 23, Ryan argued the regulations essentially eliminate contingency fee arrangements favored by businesses seeking the credit, frustrating the purpose of the credit to attract and retain employers. Ryan filed the lawsuit in August 2014.
The regulations allow GO-Biz to request information from tax credit applicants about fee arrangements and specify that such arrangements "must result in a fee that is less than or equal to the product of the number of hours of service provided to the applicant and a reasonable hourly rate for such services." In its brief, Ryan said by adding restrictions on contingency fees in its regulations, GO-Biz illegally went beyond 11 specific factors listed in the 2013 legislation creating the California Competes tax credit program that it must consider in awarding the credits. Ryan also argued that no "reasonable hourly rate" exists for its services because its agreements with clients often cover multiple years, services and locations around the country.
Businesses that hire tax and site selection consultants on a contingency fee basis may be discouraged from applying for the California Competes credit, or will locate projects outside California because of the regulations, Ryan said.
In a response filed with the court in February, GO-Biz denied Ryan's allegations and argued the company failed to state facts sufficient for a lawsuit. The office also argued that Ryan lacks standing to bring its lawsuit, and its complaint is not ripe for court action.
Iowa - The Iowa Appeal Board July 6, approved a $700,000 payment to the makers of Janie Jones, a film that was approved for more than $1.4 million in tax credits in 2009. With this settlement, the state has spent over $9 million in cash in resolving tax credit claims from its film office's closing in 2009.
Iowa had expanded its film tax credit program in 2007 offering qualified expenditure tax credits and investment tax credits. Filmmakers could receive a 25% tax credit on certain production expenses paid to Iowans or Iowa-based companies, plus a 25% tax credit on other production costs. The program was suspended, and then shut down, in 2009 after questions arose regarding the production expenses that were being awarded credits. The Iowa Legislature reused to restate the program in 2013.
New York - In Constellation Nuclear Power Plants LLC v. Tax Appeals Tribunal; 519639, the New York Supreme Court, Appellate Division, held that the Tax Appeals Tribunal's finding that nuclear power plants' assets are principally used in the production of electricity, not water or steam, was supported by the record and thus the power plants were not eligible for manufacturing tax credits. The court also found the plants were not entitled to pollution tax credits and that a certification process to qualify companies for those credits was not unconstitutional as applied to nuclear power plants.
Alaska - The Alaska Department of Revenue released a report on the effects of North Slope oil and gas credits on petroleum tax revenue, finding the credits are an "inferior investment" at best compared to investing in the Constitutional Budget Reserve Fund and do not beat the risk-to-reward benchmark that would justify their existence.
California - In a report issued by FilmL.A., it stated that despite the 1.9% slip in on-location film production in Greater Los Angeles in the second quarter of 2015, there is growth in local scripted television production, and 22 dramas approved for California's film incentive annually spend about $1.2 billion in the state and employ thousands of individuals.
New York - Special tax breaks granted to a New York City mixed-use luxury condo high rise known as One57 will cost the city $65.6 million in forgone property tax revenue over 10 years, according to a July 15 report by the New York City Independent Budget Office (IBO). The IBO released a study examining the cost-effectiveness of the city's controversial 421-a property tax incentive program. The IBO used One57 as a case study in examining how effective the program is at creating affordable housing. The 421-a tax incentive granted to One57 will yield 66 units of affordable housing in the Bronx at a price tag of $905,000 per apartment, the study said. By comparison, if One57 did not receive the tax subsidy, 367 affordable apartment units could have been created at a cost of $179,000 per unit, the IBO estimated.
Created in 1971, the 421-a program has provided tax breaks to real estate developers to develop affordable housing; it was set to expire on June 15. However, lawmakers temporarily extended it until December 15, 2015, as part of a larger statewide property tax relief package.