The Recent Surge in State Tax Credits and Incentives Offerings · The Recent Surge in State Tax...

The Recent Surge in State Tax Credits and Incentives Offerings

Madison Barnett Olga Goldberg Houston SALT Roundtable Houston, TX September 10, 2015

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©2015 Sutherland Asbill & Brennan LLP

Agenda

• Overview of State and Local Tax Credits and

Incentives

• Developments

• Texas Credits and Incentives

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Overview of State and Local Tax Credits and Incentives

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Types of Credits and Incentives

• Tax Credits Statutory (“as of right”) tax credits (most common) Negotiated credits (e.g., CA Competes) Quasi-negotiated credits (e.g., NY Excelsior)

• Negotiated Incentives State or local programs that provide discretionary benefits Must generally apply before committing to site Many forms (e.g., cash grants, property tax abatements,

sales tax exemptions, many others)

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Types of Tax Credits

• Jobs Tax Credits • Investment Tax Credits • Hybrid Jobs and Investment Tax Credits • R&D Tax Credits • Port Tax Credits • Targeted Credits

Green Credits (e.g., high-efficiency buildings, hybrid vehicles, recycling, telecommuting)

Film Tax Credits Digital Entertainment Tax Credits Credits for specific industries (e.g., manufacturing, high-

tech, life sciences)

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Tax Credits: Jobs Tax Credits

• Jobs Tax Credits Credit for creating and maintaining new, full-time jobs Amount is per job, often over a several-year period May be tied to other factors:

High wages Location (benefits can vary by county or tier) Type of job (full-time, permanent, state residents)

May be allowed against withholding or sales/use tax Definition of qualifying job important

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Tax Credits: Investment Tax Credits

• Investment Tax Credits Credit measured by percentage of qualifying investment Credit percentage may vary by location (e.g., GA) Increased percentages for certain types of property (e.g.,

pollution control) Definition of qualifying investment important

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Securing State Tax Credits

• Understand the parameters of available credits and whether you qualify Statutes, regulations, rulings, case law

How are key terms defined? Read the small print

Tax credits are audited as part of the corporate income tax audit DOR will hold you to statutory/regulatory rules, regardless of

what the Department of Commerce promised Letter rulings?

Clawback requirements Involvement of multiple project legal entities

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Negotiated Incentives

• Most jurisdictions have authority to negotiate incentive packages

• Negotiated incentives may include: Property tax reductions

Real and/or personal property taxes May take the form of direct abatement, tax increment

financing, or bond sale/leasebacks Cash grants Sales and use tax exemptions Utility rate and fee waivers or reductions Infrastructure grants (roads, utilities, etc.) Job training or recruitment programs and reimbursements Local permit fee waivers and expedited permitting

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• Contact state and local authorities State and/or local economic development, chamber of

commerce, department of community affairs, state tax commissioner, governor’s office

Initial contact can be anonymous Know role of each authority

• Consider how best to present the project • Timing is critical

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• Careful consideration must be given to incentives accepted Pay attention to the agreements – remember, it’s negotiable! Be conservative with jobs and investment commitments Clawback provisions

Negotiate upfront. Westlake v. VWS, Inc., 2014-Ohio-1833 (Ohio App. 2014) (100% clawback upheld where agreement failed to specify)

Beware of 100% clawback provisions. Owens-Brockway Glass Containers Inc. v. State Tax Comm’n, 2014 WL 5358350 (Mich. App. 2014) (100% clawback upheld for closure in year 10 of 12)

Other strings? Prevailing wage, M/WBE requirements

Exclusivity – claiming some incentives may rule out others

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Developments

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Developments

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• Tesla’s battery “GigaFactory” in Nevada: $1.3B in tax incentives and credits • $3.5B investment

• 100% abatements of sales taxes (20 years) and property and employer excise taxes (10 years)

• Nearly $200M in transferable job and investment tax credits

• NY GigaFactory for SolarCity $750M direct state investment


Developments

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• Boeing’s new 777X aircraft manufacturing in Washington: $8.7B in tax incentives • $4B investment

• Reduced B&O tax rates • Sales tax exemption for

factory construction materials and hardware/software for development and design

• Tax preferences until July 1, 2040


Developments

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• Nike’s sportswear company expansion in Oregon: $2B in incentives • $150M investment and 500 new jobs

• 30-year single sales factor tax commitment


Developments

• Facebook data center in Fort Worth, Texas $1B investment Large data center sales tax exemption City and county incentives

Fort Worth 20-year property tax rebate, potentially $146.7M

Tarrant County 10-year abatement of 60% of all new property taxes

Tarrant County Hospital District 10-year abatement of 40% of all new property taxes

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Texas Credits and Incentives

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Texas Incentives

Discretionary Cash Grants and Loans • Texas Enterprise Fund • Skills Development Fund • Self-Sufficiency Fund • Texas Product/Business Funds • Texas Leverage Fund • Moving Image Industry Incentive

Program • Texas Capital Fund Infrastructure

Program • Texas Capital Fund Real Estate

Development Program • Defense Economic Adjustment

Assistance Grant Program • Texas Military Value Revolving Loan

Fund • Economic Development and

Diversification In-State Tuition

State Statutory Credits and Incentives • Large Data Center Incentive • State Sales and Use Tax Exemptions • Franchise Tax Deduction for Business

Relocation • Severance/Production Tax Incentives • Research and Development Tax Credit • Ad Valorem/Property Tax Exemption • Renewable Energy Incentives • Freeport Exemption

Local Negotiated Incentives • Texas Enterprise Zone Program • Chapter 380/381 • Local Type A and B Grants • Property Tax Abatement • Tax Increment Financing • Reinvestment Zones • Texas Economic Development Act

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Texas Incentive Spending?

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Source: NYT http://www.nytimes.com/interactive/2012/12/01/us/government-incentives.html#TX


Texas Enterprise Fund

• Deal closing fund

• Cash grant to businesses considering locating in Texas More than $577M awarded in FY2014 and 2015 to 17

companies

• Requirements Significant projected job creation, rate of return, capital

investment At or above average county wages Community involvement Approval of Governor, Lieutenant Governor, and Speaker of

the House of Representatives

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Texas Enterprise Fund

• State Auditor’s Office Audit (September 2014) Critical of control weaknesses that made it difficult to

determine whether award decisions were supported or to determine the number of jobs created

• 2015 budget is $120M; 2016 reduced to $90M • Economic Incentive Oversight Board

As of September 1, 2015 Governor, Lieutenant Governor, and Speaker must each

appoint two board members Tasked with evaluating a program’s economic performance

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Texas Local Gov’t Code Chapters 380/381

• Chapter 380 − Cities Municipalities may establish a program that offers

incentives—loans and grants of city funds—to promote economic development, such as commercial and retail projects

• Chapter 381 − Counties

Counties may administer and develop a program that offers incentives—loans and grants of county funds—to encourage business location and commercial activity in the county

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• Program specifics vary by jurisdiction

• Types of incentives may include: Sales tax and/or property tax rebate Property tax abatement Freeport-style property tax exemption Financing for construction, purchase of real estate, etc. Use of city personnel, equipment, or facilities

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• Common requirements Job creation Capital investment Continued operations Reporting Community input

• Requires agreement with local government

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Property Tax Abatement

• Chapter 312: Agreement between taxing unit (e.g., county, city) to exempt all or part of the increased value of real or tangible personal property from property tax for up to 10 years

• Requirements Governing body adopts guidelines/criteria and resolution to

participate under Chapter 312 Property located in a Reinvestment Zone (or Enterprise

Zone). Property not located in an improvement project financed by tax increment bonds

Property owner/lessee must make significant improvements or repairs

Possible additional requirements, such as job creation 25


Property Tax Abatement

• Can include real and/or personal property • School districts cannot participate • Requires agreement with taxing authority

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Economic Development Sales Tax

• Local sales and use tax rebates • Type A Economic Development Corporation (EDC)

Funded by local sales and use tax used to promote economic development, specifically new and expanded industrial and manufacturing activities

Generally city must be located in county with population of 500,000 or fewer

• Type B EDC Funded by local sales and use tax used to fund all projects eligible

for Type A, as well as quality of life improvements All Texas cities may participate

• A city can establish both Type A and Type B ECDs

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Economic Development Sales Tax

• Type A Projects Must create and retain primary jobs Land, buildings, equipment, improvements, facilities for:

Manufacturing and industrial facilities, distribution centers

R&D facilities Regional or national corporate headquarters

Voters can approve using Type A tax for a Type B project

• Type B Projects Sports and athletic facilities, tourism and entertainment

facilities, public parks, museums Water supply facilities Affordable housing

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Sales Tax Exemption for Data Centers

• Exempts tangible personal property including equipment, software, and electricity

• New “large” data center exemption Exemption from both state and local sales tax Requirements:

At least 250,000 square feet Create at least 40 permanent jobs, paying at least 120%

of the average weekly wage in the county Invest at least $500 million over five years Contract for at least 20 MW of electric transmission

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Tax Increment Financing

• Tex. Tax Code Chapter 311: Authorizes municipalities

and counties to create a Tax Increment Reinvestment Zone (TIRZ)

• AG Opinion No. KP-004 (2/26/2015): Creation of TIRZ by county likely violates the “equal and uniform” constitutional requirement, but counties can participate in TIRZs created by cities

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Questions?

Madison J. Barnett

Sutherland Asbill & Brennan LLP 404.853.8191

[email protected]

Olga Jane Goldberg Sutherland Asbill & Brennan LLP

713.470.6121 [email protected]

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