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.
HMB Tip of the Month:
The recent movement towards tax expenditure transparency and accountability is still in its infancy, and the true effectiveness and administrative burden of the states' varied efforts will likely begin to become clearer over the next few years. As recently shown in Louisiana, the transparency reporting requirements may be difficult to adhere to which can lead toward noncompliance. As the movement proceeds, states will hopefully continue to evolve and reform their evaluation and disclosure procedures to improve their oversight process.
Legislative, Regulative and Gubernatorial Update
Alaska- Alaska HB 247, signed into law as Chapter 4, amends the state's exploration credits; expands the powers of the Alaska Oil and Gas Conservation Commission; changes the interest rate for delinquent taxes after January 1, 2017; and makes changes to the oil and gas production tax, gas storage facility tax credits, and lease expenditures and production tax credits for municipal entities.
California- The California Film Commission (CFC) has announced a new application window, i.e., application dates, for the California Film & Television Tax Credit Program 2.0. The new application window is for relocating tv series (non-transferable tax credits) and for tv projects (non-transferable tax credits) and will run from February 10, 2017, through February 17, 2017. All new and relocating tv series must have pick up orders. By February 21, 2017, projects that rank in the top 200% will be notified to submit Phase II documents. Credit allocation letters will be issued on March 20, 2017. (Application Dates, California Film & Television Tax Credit Program 2.0, California Film Commission, 08/30/2016.)
California- California AB 2900, signed into law as Chapter 582, effective 01/01/2017, expands the online reporting requirements of the Governor's Office of Business and Economic Development (Go-Biz) with respect to the California Competes Tax Credit. Existing law requires Go-Biz to report on its website specified information regarding the credit, including the name of each taxpayer allocated a credit, the estimated number of jobs created or retained and the amount of investment by the taxpayer, the amount of credit allocated to the taxpayer, and, if applicable, the amount of credit recaptured from the taxpayer. A2900 requires Go-Biz also to post on its website the following information: (1) the primary location where the taxpayer has committed to increasing the net number of jobs or makes investments, (2) information that identifies each tax credit award that was given a priority for being located in an area of high unemployment or poverty, and (3) information that identifies each tax credit award that is being counted toward the requirement that each fiscal year 25% of the aggregate amount of credit that may be allocated is required to be reserved for small business, as defined.
California- In connection with the California film and tv credit, the California Film Commission (CFC) has updated the qualified expenditure chart for non-independent productions with partial or all principal photography outside the Los Angeles 30 mile zone. The updates further clarify those expenditures that may be considered a zone consumable (ZC) versus those that may be considered a zone expenditure (ZE) (the cost of a ZE is pro-rated based on the number of principal photography days in and outside of the studio zone, whereas the cost of a ZC is not). Also, a change regarding the tagging of payroll handling fees has been made. Since such fees are usually part of the fringe accounts and therefore budgeted as wages, the qualified expenditure chart now indicates that they may now be tagged as wages for any personnel whose salary qualifies (previously, they were categorized as non-wage (QE)). If handling fees have already been tagged as QE, the CFC will accept such tagging for budget submissions and all CPAs performing Agreed Upon Procedures have been instructed to accept such tagging without considering it an error. The updated chart is on the CFC's website. (Notice, California Film Commission, 09/20/2016.)
Delaware- Delaware has enacted a refundable tax credit for employers who hire individuals with disabilities. The credit is allowable against the corporate income tax, the bank franchise tax, the personal income tax, the insurance premium tax and the privilege tax on certain domestic insurers. L. 2016, S221 (c. 400), effective for vocational rehabilitation referrals hired after 12/31/2016).
Georgia- The report said this lack of oversight stems in part from the fact that many of the tax breaks are given multiyear authorizations, noting the oldest still in force is an exemption for the land under the Chrysler Building that dates back to 1859. The report also noted that the tax expenditures are governed by state law, meaning the city council does not have the ability to legislate changes on their own or even enact new exemptions without the state's blessing.
Iowa- The Iowa Finance Authority has adopted, effective November 2, 2016, amendments to Iowa Admin. Code § 265-12.1, -12.2 to replace the Qualified Allocation Plans (QAP) for the Low-Income Housing Tax Credit Program with two updated qualified allocation plans, one for 9% tax credits (9% QAP) and another for 4% tax credits (4% QAP), both of which are incorporated by reference in Iowa Admin. Code § 265-12.1(16).
New Jersey- New Jersey S 2041, signed into law as Chapter 51, authorizes an additional $90 million in Economic Redevelopment and Growth program tax credits, raising the total amount of tax credits that may be awarded under the program from $628 million to $718 million.
New Jersey- New Jersey Governor Chris Christie has vetoed legislation that would have extended the designation of each of the state's 32 urban enterprise zones for 10 years. If the veto is upheld, the designation, which reduces the sales and use tax rate in those zones from 7% to 3.5%, will expire for Bridgeton, Camden, Newark, Plainfield, and Trenton on January 1, 2017. (Governor Christie's Conditional Veto of Assembly Bill 2576, 08/31/2016.)
Virginia- The Virginia Department of Social Services has amended the neighborhood assistance tax credit regulations (22 VAC §§ 40-41-10 and 40-41-20, effective October 19, 2016). Beginning with tax credit allocations for fiscal year 2016‐2017, the applicant and any of its affiliates must meet the following requirements: affiliates of neighborhood organizations must demonstrate that at least 50% of the persons served are low income; at least 50% of the revenues are used to provide services to such persons; affiliates must meet the definition of "neighborhood organization"; and affiliates are not required to submit an audit, review or compilation and these reports will not apply in determining the eligibility of the neighborhood organization submitting a proposal.
Review of Incentive Programs
New York City- A report issued by members of the New York City Council Task Force on Economic Development Tax Expenditures found that tax breaks intended to spur economic development in the city cost $2.8 billion last year, and recommended more oversight to ensure the incentives are achieving their goals. The report said this lack of oversight stems in part from the fact that many of the tax breaks are given multiyear authorizations, noting the oldest still in force is an exemption for the land under the Chrysler Building that dates back to 1859. The report also noted that the tax expenditures are governed by state law, meaning the city council does not have the ability to legislate changes on their own or even enact new exemptions without the state's blessing.
Washington- The Washington Department of Revenue announced that starting July 1, 2016, a business's annual tax incentive survey and report deadline is changed from April 30 to May 31, with penalties of 35 percent of claimed tax incentive amounts if filed late and 15 percent of claimed amounts if filed more than once for the same tax incentive.
Various- In the September 14 report by the Pew Charitable Trusts titled "Tax Incentives Evaluation in 2016 -- in Law and Practice," the research group found that in 2016 alone five states enacted laws requiring regular evaluation of tax incentives, and several other states strengthened their laws or made progress in their evaluations. More than 20 states and the District of Columbia now require evaluations by law.
Various- The Motion Picture Association of America Inc. (MPAA) is defending film tax credits and has released an analysis criticizing a study by a University of Southern California professor that argued the incentives are a waste of public dollars. The MPAA argued that the professor didn't use statistics that properly reflect the types of jobs that would be affected by film tax incentives.
Georgia- Ga. Code Ann. § 48-5-2(3)(B.1), which excludes low-income housing tax credits from consideration for the purpose of determining the fair market value of real property, is unconstitutional as violating the taxation uniformity provision of the Georgia Constitution. The taxation uniformity provision, which mandates that property of the same class be assessed and taxed uniformly, states that, with specified limited exceptions, the classes of subjects for the taxation of property must consist of tangible property and one or more classes of intangible personal property. Neither real property pursuant to Code Sec. 42 regarding the low-income housing credit nor tax credits are part of this limited list of express exceptions. However, the property owners urge that this is of no moment because the tax credits are intangible personal property, and, therefore, can be assessed differently from real property without violating the uniformity requirement. However, the fact that tax credits can be transferred independently from the ownership of the associated real property does not render them intangible personal property for the purpose of valuation for taxation.
Even if the tax credits, considered artificially in isolation, are intangible in nature, they, in fact, do not exist in isolation. They are wholly dependent upon, and are not viable apart from, the real estate giving rise to them. The tax credits are an item of value tied solely to the property. Thus, they are part and parcel of the tangible real estate and may properly contribute to an assessment of fair market value. To conclude otherwise would bar from consideration a property right that plainly affects the amount a knowledgeable buyer would pay and a willing seller would accept in a sale, thus, effectively nullifying the statutory definition of fair market value. Accordingly, in as much as Ga. Code Ann. § 48-5-2(3)(B.1) exempts the income tax credits from consideration in determining the fair market value of the properties at issue, the statute grants preferential treatment for ad valorem taxation purposes and creates a subclass of tangible property other than that permitted by the Georgia Constitution. This runs afoul of the taxation uniformity provision. Consequently, the judgment of the superior court was affirmed. (Heron Lake II Apartments, L.P. v. Lowndes County Board of Tax Assessors, Ga. S. Ct., Dkt. No. S16A0691, 09/12/2016.)
Michigan- The Tax Tribunal erred when it disregarded the Michigan Department of Treasury's interpretation of the statute when computing the taxpayers' renaissance zone tax credit under the Michigan Business Tax. The amount of the taxpayer's renaissance zone credit depends on the taxpayer's renaissance zone business activity factor. In this case, the taxpayers did not have any payroll attributable to services performed in a renaissance zone or in Michigan, and accordingly, its payroll ratio was 0/0, which is an undefined number. The Tax Tribunal had granted summary disposition to the taxpayers, holding that applying the formula as written would lead to an "absurd result."
The Michigan Court of Appeals reversed, finding that the Department's interpretation of the statute, that in such circumstances, taxpayers should simply remove the undefined number from the formula, does not conflict with the statute's language, and the Tax Tribunal lacked cogent reasons to overturn the Department's interpretation. The court said that in this case, it is mathematically impossible to apply the legislature's formula in the statute as written when one of the ratios in the numerator is 0/0. This fraction is an indeterminate number that renders the entire formula indeterminate. The Tax Tribunal rejected the Department's interpretation because its present interpretation was inconsistent with its interpretations of an analogous provision in the now repealed Single Business Tax Act. That the Department changed its interpretation of the renaissance zone business activity factor does not necessarily mean that its new interpretation is unreasonable.
The court concluded that the inconsistency of the Department's interpretations was not in and of itself a cogent reason to reject the Department's new interpretation. First, in a similar statute, the legislature has indicated when the denominator should change in response to a missing factor in the numerator. Second, the language of the statute indicates that the legislature wished to provide a tax benefit to businesses that both (1) own property in a renaissance zone, and (2) invest payroll in the renaissance zone. It is sensible that if the taxpayer only does half these things, it would receive half a credit. Third, the Department's interpretation seems more consistent with rewarding investment in renaissance zones than the taxpayers' interpretation. (Andersons Albion Ethanol, LLC v. Dept. of Treasury, Mich. Ct. App., Dkt. No. 327855, 09/13/2016.)
New York- An administrative law judge (ALJ) cancelled the Division of Taxation's deficiency notices, because the taxpayers demonstrated that they were entitled to the Qualified Empire Zone Enterprise real property tax credit; having established that they met the employment increase factor as required by N.Y. Tax Law § 15(b). The Division had denied the credit finding that the taxpayers had not shown that the subject employee had been employed full-time by the enterprise for the periods at issue, and that the employee did not perform his duties within the empire zone as required by N.Y. Tax Law § 15(d)(1). The ALJ found that the taxpayers did provide sufficient evidence that the employee worked full-time, and also rejected the Division's interpretation of N.Y. Tax Law § 15(d)(1), concluding that the statute does not require that employees perform their job within the empire zone to qualify for the credit. (In the Matter of the Petition of Arteaga, N.Y.S. Division of Tax Appeals, ALJ, Dkt. No. 825700, 08/25/2016.)
Louisiana- According to a recent report from the Louisiana Legislative Auditor (LLA), four Louisiana state agencies either failed to submit information or submitted incomplete information for dozens of tax incentive reports they are required to file with the Legislature, The 46 out of 79 tax incentives that lacked complete reporting cost the state about $1.1 billion in fiscal 2015. The four agencies that weren't in compliance were the Department of Revenue; the Louisiana Economic Development agency; the Department of Culture, Recreation, and Tourism; and the Department of Environmental Quality. The DOR administers 47 of the 79 incentives.
Washington- The Washington Department of Revenue (DOR) has issued a news release announcing the availability of a new interactive software tool for viewing information about certain tax incentives. The tool, available on the DOR website, will allow users to see who has taken a particular tax incentive, which taxpayers saw the greatest tax benefit in a given year, or view different tax preferences taken by a particular taxpayer. The tool includes information from calendar years 2004 through 2014 related to incentives that required a business to file an annual survey or report. Additionally, in an effort to increase transparency and public access to information regarding the Washington State tax system, the DOR has posted, on the Tax Incentive Public Disclosure page, information for incentives taken in the 2015 calendar year. Such information has historically not been available until December. (News Release-New Tool Increases Transparency of State Tax Incentives, Wash. Dept. of Rev., 09/08/2016.)
Various- According to a Good Jobs Frist report, the taxpayer cost of the huge tax incentive deals states give to certain large corporations is larger than ever. According to the report, the cost per job of megadeals is now more than $658,000. The firm defines megadeals as a subsidy costing at least $75 million. In contrast, some subsidies are a much better bargain for taxpayers. Among the best, they found, is money for workforce development and training. They examined 33 such programs, and in 31 of them, the costs per job were less than $10,000 -- a fraction of the cost of megadeals.