HMB Tip of the Month:
More and more states are offering and/or considering offering taxpayers opportunities to monetize state income tax credits, recognizing that some taxpayers do not have sufficient liability on which to apply the credits. Tax credits can be monetized through (1) transferability (i.e. purchase and sale) of the credits; (2) a cash refund of the amount of credit not applied toward tax liability; (3) Defacto Transferable Partnership Credits which are treated for tax purposes as a transferable tax credit, but the taxpayer must be a member of a partnership for the credits to flow-thru to the taxpayer; and (4) True Partnership Allocated Credits in which the taxpayer must be a true partner in a partnership in order to receive an allocation of the tax credits (similar to federal tax credit transactions). The method of monetization available is dictated by the law, but given the potential benefits of monetization, taxpayers would be remiss in failing to review what, if any, of these options are available.
Recent Announcements of Credit/Incentives Applications and Packages
Illinois- The relocation of another big corporate headquarters to downtown Chicago is a done deal for Omaha-based ConAgra Foods, Inc. A source familiar with the deal said Governor Rauner met with ConAgra executives earlier this year and offered them Edge tax incentives to move to Illinois. Though Governor Rauner has since ordered a halt on such incentives until the state's budget impasse is resolved, the commitment to ConAgra was made before that and will be honored, the source said.
A lease has been signed at the Merchandise Mart which will accommodate approximately 700 employees, including the company's senior leadership team and certain functions of the Consumer Foods business, which are currently located in Omaha, Nebraska and Naperville, Illinois.
Massachusetts- Massachusetts on September 23, 2015 awarded $2.5 million in tax credits to global technology giant International Business Machines Corp. The credits are intended to help IBM pay for a new facility in Cambridge that is involved in technology and healthcare. In its preliminary application, IBM said the project would include the creation of at least 500 new jobs -- with an average salary of $141,000 -- and a capital investment of about $53 million.
The credits for IBM are part of the approximately $3.6 million in tax credits awarded by the Massachusetts Economic Assistance Coordinating Council to 13 projects taking part in the state's Economic Development Incentive program. Overall, the projects are expected to create 717 new jobs and retain 935 jobs while leveraging about $172.6 million in private investment,
The tax credit awards came one day after the Massachusetts Joint Committee on Revenue heard testimony on bills that proponents said would provide greater transparency and accountability for business tax credits and incentives, while opponents contended the bills would give state officials unfettered access to confidential taxpayer information.
New Jersey- On September 11, 2015, the New Jersey Economic Development Authority (NJDEA) announced that it awarded a $252.7 million tax incentive to a scrap metal recycler to build a campus in the distressed town of Camden, which could sway the company from its alternate plans to expand in Louisiana. The NJDEA approved the award for EMR Eastern LLC and affiliates, which has New Jersey headquarters in Bellmawr in Camden County, as part of a $313 million wave of Grow New Jersey tax credits for projects throughout the state.
The EMR Eastern award, which would be distributed out over a decade, was the biggest in the sweep of six projects aiming to support business growth in areas targeted by the Economic Opportunity Act. Those areas make up towns with designations such as Distressed Municipalities, Urban Transit Hubs, and, like Camden, Garden State Growth Zones. The EMR Eastern project alone would generate net benefit $17 million over the 35-year period required by the statute, according to NJDEA estimates.
NJEDA officials said the company confirmed that the tax incentive is "a material factor" in its decision to either expand in Camden or at existing company location in New Orleans. An expansion in Camden would retain 156 jobs in New Jersey, although only 62 would count toward the project's eligibility because they would be new to the city.
New Jersey- The NJEDA also awarded $23.4 million in tax credits to condiment purveyor Chelten House to expand in its current Logan Township location, $5.4 million to Hudson Group Retail to expand in East Rutherford, $3.6 million to Technology company Axtria Inc. to expand in Berkeley Heights and $3.5 million to B Positive National Blood Services to build a project in Pitman. Officials also approved a $3.3 million incentive to Yellowstone Capital in hopes of wooing the company to Jersey City.
Ohio- On September 28, 2015, Governor Kasich announced his approval of job creation tax credits for eight economic development projects reviewed by the Ohio Tax Credit Authority that are expected to generate $117.7 million in new payroll and spur nearly $103.8 million in investment across Ohio. One of the projects approved include a 55%, eight-year Job Creation Tax Credit for A.J.M. Packaging Corporation whoexpects to create 150 full-time positions, generating $4.5 million in new annual payroll as a result of the company's new project in the City of Bellevue.
Legislative, Regulative and Gubernatorial Update
California- California lawmakers are set to approve legislation that would allow small businesses to convert a portion of the state's tax credit for research and development into cash grants. AB 437 passed the State Senate September 1, and is now awaiting final approval by the State Assembly. The bill then would head to Gov. Jerry Brown (D) for his signature.
California provides tax credits to help defray costs associated with businesses' efforts at innovation. AB 437 would allow businesses that receive that subsidy to convert into cash the portion of their credit that they can't claim against their income taxes. According to a statement in support of the bill by the California Chamber of Commerce, start-up businesses in particular "lack the tax liability to take advantage of the R&D tax credit program" in many instances.
AB 437 would allow up to 10 percent of a business's unused tax credits from 2015 and 2016 to be converted into grants in 2017. For excess credits issued between 2017 and 2022, a business would be eligible for up to 15 percent of cash grants. To qualify for the program, a business must have gross receipts of under $5 million annually and must have filed income tax returns for two years before seeking a grant.
Florida- In TIP No. 15ADM-04, the Florida Department of Revenue has announced that except for some extensions provided for in state law, the enterprise zone program expires on December 31, 2015; for businesses that do not qualify for the extension program, enterprise zone credits or refunds will be approved after December 31 only if statutory requirements are met.
Georgia- In IT-2015-7, the Georgia Department of Revenue has proposed amendments to the rule on film tax credits (Rule 560-7-8-.45) to specify the credit caps for qualified interactive entertainment production companies and to specify new application procedures and reporting requirements.
Maryland- On September 21, 2015, the Baltimore Mayor announced plans to introduce to the City Council legislation to create a personal property tax credit for grocery stores in portions of the city deemed to be "food deserts." According to the Major, the bill is designed to be "very narrowly focused and has one priority, attracting and retaining supermarkets in areas where they are most needed."
A food desert, according to the bill, is a low-income area where the nearest supermarket is more than a quarter mile away and most residents do not have access to personal vehicles. The bill would establish a 10-year personal property tax credit for grocery stores located in underserved areas of the city. The credit would be for up to 80 percent of the amount of personal property tax the business would otherwise owe the city.
The credit is being proposed under authority granted by the Maryland General Assembly in SB 541, which was enacted in April 2015. The bill is not designed to attract megastores or small corner stores but rather is meant to attract and retain supermarkets that can meet the full food needs of underserved areas.
To be eligible to receive the credit, a taxpayer must operate a newly constructed or newly renovated grocery store that has invested at least $150,000 or $25 per square foot of floor space in new personal property and dedicates at least 500 square feet to selling fruits and vegetables and another 500 square feet to selling meat, seafood, and dairy products.
North Carolina- North Carolina House and Senate negotiators on the fiscal 2016 budget, which is more than two months late, have a tentative agreement on tripling the amount available for film grants from $10 million to $30 million in each of the next two budget years.
South Carolina- In Revenue Procedure No. 15-3, the South Carolina Department of Revenue released procedural guidance (1) explaining how a taxpayer may request approval of an economic development incentive based on an alternative apportionment method, and (2) providing an overview of the application process and the conditions that must be met to qualify for an incentive-based method.
With respect to an alternative apportionment method, Code Sections 12-6-2320(B), 12-6-2320(C), and 12-15-40 allow a taxpayer and the Department to enter into an agreement to use an allocation and apportionment method other than the standard single sales method, gross receipts method, or industry specific methods (including special formulas for railroad, telephone, airline companies, etc.).1 The economic development based alternative allocation and apportionment methods for companies who are planning new facilities or expansions in South Carolina are: (1) a maximum 5 year method for a new facility or expansion, (2) a maximum 10 year method for a large new facility or expansion, (3) a method for a taxpayer constructing or operating a qualified recycling facility, (4) a method for the establishment of a life sciences facility, and (5) a method for the establishment of a renewable energy manufacturing facility.
Colorado- A Colorado state appeals court on September 10, 2015 upheld the dismissal of a lawsuit 11 Colorado hotels launched to block tax incentives earmarked for an $824 million resort project, saying the properties lack standing. The hotels filed suit in 2013 after Colorado Attorney General John W. Suthers rejected their request to review the incentives award when a new developer took over the resort project.
The appeals court concluded that the hotels can't challenge the Colorado Economic Development Commission's 2012 decision to award the city of Aurora $81.4 million in tax incentives for the Gaylord Rockies Hotel and Conference Center, saying the hotels failed to prove they suffered direct economic harm.
"We recognize that, by subsidizing a direct economic competitor, the CEDC may cause the hotels economic harm; however, such alleged harm would result from the relative economic strength of their competitor - here, the RIDA/Marriott Development - and thus would be indirect," the court said.
The ruling clears the path for construction of the 1,500-room hotel and water park near Denver International Airport.
After securing the necessary approvals for the resort, Gaylord Entertainment Co. sold off its interest in the project and development was taken over by Texas-based Rida Development Corp. and Marriott International Inc. which the hotels argued should force re-evaluation of the incentives.
In its bid to throw out the case, the city argued that the hotels lacked standing as taxpayers to pursue the suit and had no right to use the courts to intervene in the administrative review process of an agency's awarding of the tax incentives.
In October, the city, as well as the Aurora Urban Renewal Authority and resort developer Rida Development Corp., filed a countersuitalleging tortious interference against the group. The city and its fellow plaintiffs have argued that the original suit is frivolous and that the hotel owners have taken other wrongful actions to block construction of the proposed Gaylord Hotel and Conference Center, which it said would bring new competition to the area. Arguing that the delays have led to financial costs, the city is seeking to recover damages from the hotels.
The Colorado District Court dismissed the countersuit in November, saying the hotels' litigation "had an objectively reasonable basis." The underlying lawsuit filed by the hotels was also dismissed last year for lack of standing by the same court.
In upholding the district court decision, the appellate court also cited separation of powers, noting the Colorado General Assembly had passed the Regional Tourism Act, which gave the CEDC authority to award the incentives to promote development of large-scale regional tourism projects.
Iowa- In Matter of Commerce Bank, Docket No. 2015-250-1-0247, the Iowa Department of Revenue denied a banking subsidiary's petition for a declaratory order regarding the transfer and bifurcation of purchased Workforce Housing Tax Incentive Program credits, explaining that the questions raised by the petition would more properly be resolved in a rulemaking process.
New Jersey- In Padilla v. City of Elizabeth; Docket No. 018378-2011, the New Jersey Tax Court determined that a taxpayer did not show it reasonably relied to its detriment on any information provided by the city of Elizabeth when it transferred ownership of a property to a limited liability company, which made the property ineligible for owner-occupied multi-unit residential property abatements.
Alaska- Oil companies and the State of Alaska are at odds once again. Alaska oil companies defended the state's generous industry tax credits at a September 22 hearing of the Senate Oil & Gas Tax Credit Working Group. The group was created to evaluate the state's oil industry tax credits. Gas credits are under scrutiny as the state deals with oil tax revenue shortfalls caused by low fuel prices.
Governor Walker postponed over $200 million in oil industry tax credit payments this summer. His office said in a statement that the governor believes the state must modify its oil tax credit program. At the committee hearing, however, representatives from oil companies in the Cook Inlet area said cutting credits would hurt investments in the state by the industry. The high cost of operating in Alaska and the importance of luring smaller oil companies to areas with lower concentrations of oil make the state's support critical, they said.
Some lawmakers praised the oil companies for helping to assuage supply problems that areas in Alaska had been facing a few years ago while others stated that the state's financial situation requires serious evaluation of the money given to companies.
Washington- Washington state unions and lawmakers are upset over the decision by Boeing Co. to open a completion and delivery center in China less than two years after the aerospace giant received nearly $9 billion in tax incentives to grow the state's aerospace industry.
Boeing and Chinese President Xi Jinping announced September 23 that China has committed to purchase 300 jets at a price of $38 billion. Boeing and China's state-owned jet manufacturer, Commercial Aircraft Corporation of China Ltd., will also jointly open a facility at an undisclosed location in China for the interiors completion, paint, and delivery of Boeing 737 aircraft to Chinese customers.
Currently, all Boeing 737 aircraft are assembled, finished, and certified in Washington before delivery. The state awarded Boeing $8.7 billion in tax incentives in November 2013 to build its 777X jetliner in Washington, outbidding 22 other states trying to woo the company. The state had already given Boeing $3.2 billion in tax incentives in 2003.
Boeing defended its move and said that no jobs will be lost in the state.