New tax credit
Implications for educational institutions

New tax credit

On July 22 2010 North Carolina Governor Beverly Purdue signed into law legislation that creates a new and innovative tax credit for companies developing interactive digital media, including video game companies and developers of online virtual worlds and interactive websites that allow consumers to create and manipulate certain digital goods (ie, avatars in role-playing scenarios).

Interactive digital media developers that are currently located in North Carolina – as well as those contemplating doing business in North Carolina – should evaluate their business activities to take full advantage of the tax benefits of the tax incentive credit when it becomes effective in 2011. Specifically, companies should consider joint ventures with educational institutions in order to maximise the benefits provided by the credit.

Effective on January 1 2011, House Bill 1973 (Session Law 2010-147) provides a tax credit of 15% on expenses related to the development of interactive digital media. 'Interactive digital media' includes material produced for electronic distribution, such as material that is intended for distribution through electronic download over the Internet that contains (i) a computer-controlled universe in which the user interacts for an intended goal, and (ii) animation, sound, text, fixed images or three-dimensional geometry.(1) The tax credit may be applied against either franchise or income tax; however, the election is binding.(2)

The bill also sets down specific expenses against which the credit may be taken, including:

  • compensation and wages paid to full-time employees;
  • amounts made in contribution to health, pension and welfare accounts by employees; and
  • amounts paid to North Carolina community colleges and universities for services performed in the state.(3)

Notably, the credit increases to 20% on the development costs incurred for work performed by community colleges and universities located in North Carolina.(4)

Implications for educational institutions

North Carolina is home to a multitude of interactive media companies, including Electronic Arts, Epic Games, Red Storm and Atomic Games. While the credit created under the bill is presumably aimed at retaining and growing these existing industries – and attracting new ones to the state – it goes further than similar legislation recently enacted in Florida, Georgia, Louisiana and Virginia by providing for a higher tax credit for development expenses paid to North Carolina schools.(5)

The education partnership component of the North Carolina incentive creates a unique opportunity for digital companies to undertake joint ventures with non-profit universities that may, depending on how and for what purpose they are structured, even qualify for additional state or federal tax credit programmes. As an example, a video gaming company might form a joint venture to develop a new line of interactive online games with a community college located in a rural community, with the venture being housed in a certified leadership in energy and environmental design facility. A host of potential state and federal credits could apply to such a venture (ie, research and development, leadership in energy and environmental design, empowerment and zone credits).

The potential for tax credits may also give the video gaming companies an opportunity to form venture partnerships apart from their usual norms. For example, a video game company may form a joint venture with a university to develop an online, interactive game that would create 'shaping' exercises for the benefit of autistic children. Such a venture could qualify not only for the digital interactive media credit on development expenses (ie, wages), but also for other state and federal tax credits that do not apply to compensation expenses.


Certain restrictions apply to the new interactive digital media credit. The credit is allowed against the percentage of the taxpayer's expenses that exceed $50,000 and cannot exceed $7.5 million.(6) In addition, certain prohibited classes of interactive digital media (ie, casino gaming, company advertisements, political advertisements and obscene materials) are excluded from the credit.(7)

For further information on this topic please contact Donald M Griswold or John P Feldman at Reed Smith LLP's Washington DC office by telephone (+1 202 414 9200), fax (+1 202 414 9299) or email ([email protected] or [email protected]). Alternatively, contact Michael A Jacobs or Kelley C Miller at Reed Smith LLP's Philadelphia office by telephone (+1 215 851 8100), fax (+1 215 851 1420) or email ([email protected] or [email protected]).


(1) NC Session Law 2010-147, Part III, Section 3.6 (GS § 1095-129.56).

(2) GS § 105-129.52(a).

(3) GS § 105-129.56(b).

(4) GS § 105-129.56(c).

(5) See S1752: Relating to Economic Development (approved by governor; Ch 2010-47 on May 28 2010) (Florida); HB 1100 – Income tax credit; qualified film, video, or digital productions (signed into law May 12 2008; Art 2, OCGA Ch 7, Tit 48) (Georgia); Louisiana Acts 2005, No 346, § 1, eff June 30 2005 (Louisiana); VA House Bill 861/Senate Bill 257 (signed into law April 11 2010, Va Code 58.1-439.12:03, eff January 1 2013) (Virginia).

(6) GS § 105-129.56(b).

(7) GS § 105-129.56(d).

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