This is the third in a monthly series outlining updates in state tax credits and incentives, including but not limited to 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 with states competing with each other for jobs and investment. The good news for all types of entities is that state tax credits and incentives are available and can benefit an entity in many ways.
HMB Tip of the Month: When negotiating terms of any credit/incentive package, it is vital that the recipient of such a package analyze what it realistically can invest in terms of capital and workforce in the relevant jurisdiction(s) and that it maintains (either in-house or through outside consultant(s)) a checks and balances system to file the necessary reports with the relevant jurisdiction(s) in order to avoid a potential clawback of a portion or all of the credit/incentive package. As outlined in this update, recipients of packages who don't engage in proper due diligence can face backlash and undesirable consequences from the awarding jurisdiction(s).
Recent Announcements of Credit/Incentives Applications and Packages
Kentucky: On March 9, 2015, Governor Steve Beshear announced Germany-based Wacker Chemical Corp. is planning a $60 million expansion in the state creating 15 new full-time jobs. The Kentucky Economic Development Finance Authority ("KEDFA") approved the company for up to $1.6 million in tax incentives through the Kentucky Business Investment program. The performance-based incentives allows a company to keep a portion of its investment over the term of the agreement through corporate income tax credits and wage assessments by meeting job and investment targets. KEDFA also approved Wacker for tax benefits for up to $200,000 through the Kentucky Enterprise Initiative Act, which allows approved companies to recoup Kentucky sales and use tax on construction costs, building fixtures, equipment used in research and development and electronic processing equipment.
Massachusetts: Massachusetts will give Amazon.com $14.89 million in state and local tax incentives in exchange for the company's locating a distribution center in the state and hiring a specific number of workers. Specifically, the state's Economic Assistance Coordinating Council (EACC) on March 24, 2015, approved $2.25 million in enhanced expansion project credits and $1 million in job creation project credits, for a total of $3.25 million in Economic Development Incentive Program (EDIP) investment tax credits. Also, Fall River and Freetown, the two municipalities that Amazon's distribution center will straddle, will provide local tax breaks to the company in the form of a 15-year tax increment financing and personal property tax exemption agreement. Fall River's agreement is valued at around $7.81 million and Freetown's is valued at around $3.83 million.
In return, Amazon pledged to invest about $54 million in a 1-million-square-foot fulfillment center which is expected to be operational in late 2016. The project is expected to create 500 new full-time jobs and more than 2,000 seasonal jobs.
Michigan: On March 11, 2015, The Michigan Economic Development Corporation announced that 3Con Corp., a specialty equipment supplier to the automotive market, plans to locate its North American headquarters in the state, a project expected to generate $6.4 million in capital investment and 136 jobs that would be supported by a $550,000 grant and a property tax abatement.
Legislative, Regulative and Gubernatorial Update
California: Los Angeles Mayor Eric Garcetti on March 25, 2015, announced his support for California legislation that would provide a five-year tax credit for the seismic retrofit of buildings vulnerable to earthquake damage. Specifically, AB 428 which was introduced on February 19, 2015, would provide an income tax or corporate tax credit equal to 30% of qualifying costs incurred by a taxpayer for any seismic retrofit construction on a "soft story" building or "nonductile concrete" residential building built before 1980. The credit would also be available for retrofits to pre-1994 concrete residential buildings. The credit would be available for tax years beginning January 1, 2016, and before January 1, 2021. To claim the credit, a taxpayer would need to obtain certification from the appropriate code enforcement authority that the building is an at-risk property. The credit must be claimed at the rate of one-fifth of the credit amount for the tax year the credit is allowed and one-fifth of the credit amount for the four following years.
Connecticut: In February 2015, Governor Malloy proposed a budget (SB 946) which would among other things limit the use of tax credits against the corporate income tax and the health provider tax, retroactive to January 1, 2015. Under current law, the credits generally may be used to offset 70% of tax liability. Under the proposal, a taxpayer could use credits to offset only 35% of tax liability for income year 2015, 45% for income year 2016, and 60% for income year 2017 and later. The proposal would not affect a tax credit agreement enacted for United Technologies Corp. last year.
A number of Connecticut business groups on March 9, 2015, voiced their opposition to the Governor's plan to place restrictions on tax credits. For example, the Connecticut Business & Industry Association, the state's largest business organization, urged the legislature's joint Finance, Revenue, and Bonding Committee not to limit the use of tax credits because they affect business decisions on where to locate and are important for the state's economic competitiveness.
Florida: Florida lawmakers introduced legislation that would boost incentives for the state's film and entertainment industry. SB 1046 was introduced on February 19, 2015, and was unanimously approved by the Senate Commerce and Tourism Committee on March 10, 2015. The bill would restructure the state's approach to the entertainment industry and provide an additional 5% tax credit to qualified production companies that make at least a $2 million investment. It would also rename the Office of Film and Entertainment to the Division of Film and Entertainment, which will be a division of Enterprise Florida Inc. SB 1046 has been sent to the Senate Appropriations Subcommittee on Transportation, Tourism, and Economic Development for review.
Louisiana: Governor Bobby Jindal's fiscal 2016 executive budget proposal to scale back the availability of refundable tax credits for companies has angered the local business community, which is calling the proposal a tax increase. Jindal's plan would transition most of the existing tax credits, including the inventory tax credit, from refundable to non-refundable and reduce the payouts to companies by $526 million. Business groups are calling this reduction a tax increase. Specifically, the Louisiana Oil and Gas Association said that the elimination of the inventory tax credit amounts to a $400 million tax increase on businesses. The Legislature will decide what to do with the state's tax credit programs when it convenes on April 13.
Maryland: On February 11, 2015, HB 550 entitled the State Aid Business Transparency and Financial Disclosure Act was introduced which requires corporations that obtain certain state subsidies such as the Job Creation Credit, the One Maryland Tax Credit, and credits from either of the two Economic Development Funds to file annual disclosure reports to the granting body and provides for publication of a "compilation" of disclosure reports to the granting body's website. HB 550 also imposes the reporting requirements and public disclosure for all other state "subsidies," which are broadly defined to includeall tax exemptions and credits (excluding sales and property tax exemptions and credits) with a total value of at least $50,000.
In testimony before Maryland lawmakers on March 11, 2015, the Council On State Taxation ("COST") opposed HB 550 as being overly broad and burdensome for Maryland businesses. COST noted that while excluding sales and property taxes has narrowed the universe of potential reporting and disclosure related to these "subsidies," taxpayers have no way of knowing what "subsidies" are subject to disclosure. In addition, COST urged Maryland to keep in mind the potential harmful effects of disclosure requirements on Maryland's economic competitiveness and to to review the scope of information sought to ensure the proposed requirements do not defeat the intent of the incentives or violate a business's reasonable expectation of confidentiality.
Massachusetts: On March 4, 2015, Governor Charlie Baker proposed a budget plan for fiscal year 2016 that contains no new tax increases but would increase the earned income tax credit from 15% to 30% of the federal limit over a four-year period. To offset that revenue cost, the governor proposed eliminating the state's film tax credit as of July 1, 2017.
Massachusetts: On March 6, 2015, the Department of Revenue released a working draft of TIR-15-XX. This TIR announces a statutory change, enacted June 26, 2014, and effective March 24, 2015, which creates new certification requirements for (1) employers entering into contracts with the Commonwealth of Massachusetts or its agencies or instrumentalities for goods, services, and leases valued at more than $5,000 and (2) employers seeking certain tax credits in excess of $5,000. Beginning March 25, 2015, with respect to the three tax credits for which the Department of Revenue is the administering agency -- the film credit, the Brownfields credit, and the medical device credit - the Department will require an employer certification to be on file (either submitted with a timely filed credit application or provided separately) from applicants. To be valid, the certification must be dated no more than ninety (90) days prior to submission to the Department. With respect to credits that are awarded and/or issued by other agencies, those agencies will require the employer certification as part of their approval processes and taxpayers that are employers and that seek those credits should contact the authorizing agency for information on the specific requirements, including the time and manner for filing such certification.
Michigan: The Michigan House of Representatives passed a bill March 11, 2015, (HB 4122) that would eliminate the state's film tax credit program as of October 1. The bill will now be sent to the Senate.
North Carolina: Governor Pat McCrory and the Republican leader of the North Carolina Senate and several of his colleagues are at odds as to several corporate tax and tax incentive bills, and it will definitely be interesting to watch what happens in North Carolina. Specifically, the Governor supports HB 117 which was approved by the House of Representatives on March 5, 2015. HB 117 would increase funding for job and site development incentives, amend the special apportionment provisions for qualified capital-intensive corporations (allow single-sales factor apportionment for businesses investing more than $1 billion), and provide a sales tax exemption for electricity used by data centers.
HB 117 titled the "North Carolina Competes Act," would double the total incentives authorized under the state's Job Development Investment Grant program. That program provides a discretionary incentives of annual grants given directly to new and expanding businesses calculated off the amount of personal income tax withholdings generated by the new employees hired by the business. Under HB 117, the expanded program would be capped at $45 million in grants annually. The bill would also transfer an additional $20 million to the state's Site Infrastructure Development Fund, which provides assistance for site development and infrastructure improvements for businesses investing $100 million and creating at least 100 jobs in the state.
On March 18, 2015, SB 338 was filed which among other things would establish a single-sales-factor apportionment for all entities in 2016 and would shift some tax incentive money from the state's largest counties -- those that house cities such as Charlotte, Raleigh, and Durham -- to smaller, more rural counties. However, the bill would make some exceptions to that policy if "major manufacturing projects -- like automobile and aerospace manufacturers -- that commit to investing at least $1 billion and creating at least 2,500 new North Carolina jobs" decide to locate in one of the large counties.
Separately on March 18, 2015, another bill was filed which would provide $27.5 million to the state's largest incentives fund for the rest of 2015. Finally, on March 19, 2015, SB 340 was filed which would create a new incentive program with three different tiers. The first would be for businesses that create 250 full-time jobs and invest $10 million, the second would be for businesses that create 400 full-time jobs and invest $17.5 million, and the third would be for businesses that create 600 full-time jobs and invest $25 million.
Case Law Update
Kentucky: In February 2015, the builder of a religious theme park filed a complaint against Kentucky alleging that by denying the builder access to a tourism tax incentive program (which provides for sales tax refunds), the state discriminated against the builder based on its identity, beliefs, and expression of beliefs and thereby violated the U.S. Constitution's First, Fifth, and Fourteenth Amendments. Ark Encounter LLC v. Stewart; Case No. 3:15-CV-00013-GFVT. In March 2015, Kentucky filed a motion to dismiss the a lawsuit arguing that not only did the complaint fail to present a viable claim upon which relief can be granted, but also that providing the incentives would be unconstitutional.
States' Evaluation and Review of Credit and Incentive Programs
Alabama: The Alabama State Senate on March 18, 2015, passed SB 119 that would require a state agency to submit an annual tax expenditure report detailing the state's tax incentives, credits, deductions, and exemptions. SB 119 would require the Legislative Fiscal Office to submit an annual report listing all state tax expenditures and the estimated costs associated with each one. The report is to be submitted to the Legislature at the same time the governor is required to submit his budget proposal. The bill, which passed on a 30 to 0 vote, is now headed to the House for consideration.
New Jersey: A 660 in New Jersey that was recently approved by the Assembly Commerce and Economic Development Committee on January 12 and the Assembly Appropriations Committee on March 16, 2015, would require the state auditor to audit the New Jersey Economic Development Authority's programs every two years and publish a report. The report would be required to include detailed information on grants, loans, and tax credits awarded by the agency and on the private businesses that received those incentives. Specifically, for any tax credit or grant awarded after December 31, 2006, in an amount over $1,000, the auditor would be required to specify the corporation that receives the tax credit, the amount of the credit, the number of jobs the company has promised to create, and the number of jobs actually created. In addition, A 660 also would create a legislative task force on business development incentives composed of 14 members of the State Legislature which would study the effectiveness of the business development and retention incentives.
Oklahoma: The Oklahoma State Senate on March 4, 2015, overwhelmingly approved two bills requiring the evaluation of tax credits and other economic incentives pursuant to a request that Gov. Mary Fallin requested in her State of the State address on February 3. SB 806 would require that all tax incentives include measurable goals, while SB 815 would require that legislators receive data on all incentives, including their costs and assessments of whether and how well their goals are met. The Senate bills now go to the House.
Interesting Updates Regarding Clawbacks (or Potential Clawbacks)
Illinois: On March 24, 2015, a Chicago TV and movie studio on the West Side is handing back $10 million to the state of Illinois one day after Governor Bruce Rauner ordered the money's return amid questions about how the grant was awarded. Specifically, Cinespace Chicago Film Studios -- where TV series "Empire" and "Chicago Fire" have been shot -- is repaying a grant given to it to expand its facility in North Lawndale amid reports that the grant was given without any appraisals of the properties to be acquired or even contracts with the property owners.
In the letter to the acting director of the Illinois Department of Commerce and Economic Opportunity, which made the grant, Cinespace President Alex Pissios said that the grant was intended to create "educational space to be used primarily for the use and development of cinematic arts programs of local universities and colleges," however, "six of the seven parcels Cinespace was interested in acquiring for the Education Projects have been sold or are under contract to other third parties."
The $10 million grant came on top of four state grants totaling $17.3 million given to Cinespace since 2011. In December 2014, Chicago Mayor Rahm Emanuel even held the kickoff rally to his re-election campaign at Cinespace. In 2013, the Emanuel administration supported a property tax break worth $3.5 million to Cinespace, citing the importance of TV and film production to the Chicago economy. Cinespace had completed $39 million in rehabilitation and environmental remediation since 2011, according to a news release issued at the time.
Oregon: The Oregon Department of Energy (DOE) has requested an investigation of its recently expired incentives for solar energy based on media reports that it was defrauded through the use of fake invoices. The allegations revolve around a solar energy project being pursued by the Oregon University System, which sought financing through the business energy tax credit (BETC) program. The DOE has alleged that it approved credits for the program apparently relying on invoices from a nonexistent company indicating that it had already begun installing the foundations for solar racks at each of the Oregon University campuses.
Washington: New records from Boeing Co. indicate that the company has been forcefully defending and asserting its right to move jobs out of Washington, even as it lobbied for billions of dollars in tax incentives meant to grow the aerospace industry in the state. In a brief filed this March 2015 with the National Labor Relations Board, Boeing insists that it has the right to move work done out of Washington and notes that it has "regularly exercised that right."
Boeing provided a list of "at least 16 times" when it shipped jobs out of the area in the previous two years -- at the same time it was lobbying for and began accepting $9 billion in incentives offered in SB 5952, which extended until 2040 tax preferences for a variety of aerospace-related industries, including lower rates, tax credits, and sales and excise tax exemptions.