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State Tax Incentives, Clawbacks and COVID-19

Through various state and local tax incentives, many businesses have committed to grow their employee count or make substantial capital expenditures. Not surprisingly, companies may fall short on delivering those objectives in the short run. Long-terms plans may also need to change drastically. Companies should carefully consider the terms of their agreements with states to identify whether: Employment targets will be met; Investment targets will be met; and Clawbacks or other damages are a possibility. If clawbacks are possible, force majeure provisions in incentives agreements should provide protection. When agreements do not specifically contain a force majeure provision, businesses and governments should work together to renegotiate or amend those agreements in a way that protects local business’ long-term viability in a region.

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QHTC You Later: DC Bids Farewell to Historic QHTC Certification Process

The District of Columbia (DC) Office of Tax & Revenue (OTR) implemented sweeping changes to the Qualified High Technology Company (QHTC) certification process this year. As you may remember, beginning last year, OTR implemented a new online QHTC self-certification process for companies to obtain exempt purchase certificates. This year, OTR is expanding the scope of this online self-certification requirement to all QHTC benefits—including exempt sales as a QHTC and other non-sales tax benefits available to a QHTC (summarized here). This change was accomplished through amendments to the QHTC certification regulation (DC Mun. Regs. tit. 9, § 1101) that were proposed by OTR in November 2018 and became final on January 4, 2019. The changes apply to all tax returns due on or after January 1, 2019. So What Changed? Historically, the relevant OTR regulation provided that to claim a credit or other benefit, a QHTC was required to attach a form prescribed by OTR...

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MTC Marketplace Seller Voluntary Disclosure Initiative Underway

Yesterday, the application period opened for the limited-time MTC Marketplace Seller Voluntary Disclosure Initiative opened and it will close October 17, 2017. Since our last blog post on the topic detailing the initiatives terms, benefits and application procedure, six additional states (listed below) have signed on to participate in varying capacities. The lookback period being offered by each of the six states that joined this week is described below. District of Columbia: will consider granting shorter or no lookback period for applications received under this initiative on a case by case basis. DC’s standard lookback period is 3 years for sales/use and income/franchise tax. Massachusetts: requires compliance with its standard 3-year lookback period. This lookback period in a particular case may be less than 3 years, depending on when vendor nexus was created. Minnesota: will abide by customary lookback periods of 3 years for sales/use tax and 4 years (3...

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MTC Offers 18 State Marketplace Seller Amnesty Initiative

The Multistate Tax Commission (MTC) is moving quickly to implement a multistate amnesty program through its current National Nexus Program (NNP) for sellers making sales through marketplaces. The new MTC marketplace seller amnesty program is limited to remote sellers (3P sellers) that have nexus with a state solely as the result of: (1) having inventory located in a fulfillment center or warehouse in that state operated by a marketplace provider; or (2) other nexus-creating activities of a marketplace provider in the state. Other qualifications include: (1) no prior contact/registration with the state; (2) timely application during the period of August 17, 2017 through October 17, 2017; and (3) registration with the state to begin collecting sales and use tax by no later than December 1, 2017, and income/franchise tax (to the extent applicable) starting with the 2017 tax year. The baseline guarantee is prospective-only (beginning no later than Dec. 1, 2017)...

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New Jersey Issues Guidance on BEIP Grant Conversion

This month the New Jersey Economic Development Authority (the Authority) provided businesses with guidance, in the form of Frequently Asked Questions, on how to elect to have their unpaid Business Employment Incentive Program (the Program or BEIP) grants converted into tax credits pursuant to N.J. Rev. Stat. § 34:1B-129. Under the Program, New Jersey awarded qualifying businesses cash grants for hiring new employees in the state for a term of up to 10 years.  Since the Program’s inception in 1996, the Authority has executed 499 BEIP agreements valued at nearly $1.6 billion.  However, since 2013, the New Jersey legislature has not funded the Program, and thus many businesses have not received grant payments owed by the state. In January, Governor Christie signed P.L. 2015, c. 194 into law, permitting the voluntary conversion of outstanding BEIP grants into tax credits. The option to convert a BEIP grant to a tax credit is New Jersey’s attempt to provide relief...

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Massachusetts Court Holds Department of Revenue’s Guidance to Be Unreasonable

Northeastern University, the Trustees of Boston University, Wellesley College and 131 Willow Avenue, LLC prevailed in their appeal of the Massachusetts Department of Revenue’s (the Department) rejection of their Brownfields tax credit applications in Massachusetts Superior Court. 131 Willow Avenue, LLC v. Comm’r of Revenue, 2015 WL 6447310 (2015). The taxpayers argued, and the court agreed, that the Department improperly denied their applications based on the unlawful use of Directive 13-4 issued by the commissioner of revenue (the Commissioner). At issue was the validity of Directive 13-4’s prohibition on nonprofit and transfer Brownfields tax credit applicants from receiving or transferring credits based on documentation submitted in a taxable year that commenced before the effective date of a 2006 amendment expanding the Brownfields tax credit statute to include nonprofit organizations and allow for credit transfers. The court held that the directive was...

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Tax Breaks for Data Centers: The Numbers Might Be Cloudy

States are competing aggressively to attract data centers with various tax incentives. Data center companies and their business customers are taking them up on their offers. But are these incentives really a good deal for the businesses? Tax incentives that seem attractive at first glance may not be beneficial when they are examined in the context of the entire tax picture, especially in the unique, uncertain, and developing world of state taxation of technology and computer services. With the rise of global commerce, cloud computing, streaming video and a wide array of other internet-related businesses, data centers have become big businesses.  In 2014, the colocation data center industry reached $25 billion in annual revenue globally, with North American companies accounting for 43 percent of that revenue.[1] To get in on the action, states have been trying to outdo one another by offering a slew of competing tax breaks to the industry. According to the...

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Taxpayers Stand to Lose Under Chicago’s Lease Tax VDA Offer

Yesterday, the City of Chicago (City) Department of Finance (Department) published an Information Bulletin that provides additional guidance on the Personal Property Lease Transaction Tax (Lease Tax) and extends a new Voluntary Disclosure Agreement (VDA) offer to providers and customers. The updated guidance includes an overview of the Lease Tax, a description of the amendments included in the FY 2016 Revenue Ordinance that passed on October 28, 2015, and answers to 15 FAQs. The details on the Department’s controversial interpretation of the Lease Tax in Ruling #12 and the recent amendments to the Lease Tax have been covered by the authors in prior blog posts, available here and here. The new VDA offer is a significant development that may be enticing to certain providers and customers. However, before providers and customers rush to sign up to pay the Lease Tax for the foreseeable future, they should carefully evaluate whether any Lease Tax obligation is in...

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Should Companies Adjust Their Incentive Strategies in Light of New Governmental Accounting Disclosure Requirements?

Earlier this month, the Governmental Accounting Standards Board (GASB) approved Statement No. 77, Tax Abatement Disclosures, which requires state and local governments to report on foregone revenue from tax abatement agreements. This will significantly increase scrutiny of negotiated tax incentives, particularly at the local level. Businesses need to consider how this may change their local incentive strategies. To summarize, Statement 77 requires state and local governments to disclose basic information about their current incentive agreements, or other agreements, that reduce tax revenue: Dollar amounts by which the government’s tax revenues were reduced as a result of tax abatement agreements; The name and purpose of each tax abatement program; The specific taxes being abated; The authority under which the tax abatement agreements are entered into; The criteria that make the recipient eligible to receive a tax abatement; The mechanism by which the taxes...

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Tax on Tax Credits: U.S. Tax Court Addresses Federal Taxation of Refundable State Credits in Maines

As more and more states offer refundable tax credits to induce economic development, it is critical for businesses weighing incentive offers to take into consideration the federal income tax implications of an award. While a payment may be called a "credit" and claimed on a state tax return, that payment might nonetheless constitute taxable income for federal tax purposes. Imposition of federal income tax on incentive payments can materially reduce their value and should be considered when weighing the potential benefit of an award. A recent United States Tax Court decision, Maines v. Commissioner, demonstrates that risk. Read the full article.

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