Incentives
Subscribe to Incentives's Posts

Federal COVID-19 Relief Bill Brings State Tax Policy to a Grinding Halt

On March 11, 2021, US President Joe Biden signed the American Rescue Plan Act of 2021 (ARPA), the COVID-19 relief bill that includes $350 billion in relief to states and localities. To prevent states from using federal relief funds to finance tax cuts, Congress included a clawback provision requiring that any relief funds used to offset tax cuts during the next three years be returned to the federal government. Here is the text of the provision:

  • A State or territory shall not use the funds provided under this section or transferred pursuant to section 603(c)(4) to either directly or indirectly offset a reduction in the net tax revenue of such State or territory resulting from a change in law, regulation or administrative interpretation during the covered period that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit or otherwise) or delays the imposition of any tax or tax increase.

This language broadly prohibits states from taking legislative or administrative action through the end of 2024 that reduces state tax revenues by any means (deduction, credit, delay, rate change, etc.) if doing so could be characterized as the use of federal relief funds to offset, directly or indirectly, the tax reduction. Practically speaking, this limitation will completely hamstring state and local governments from the normal ebb and flow of tax policy changes, adjustments and interpretations. Taken to its logical conclusion, this language freezes state legislative and administrative tax policy development out of fear anything they may do would require the return of federal relief funds. We expect the US Department of the Treasury will issue guidance clarifying this provision in the coming weeks.

Practice Note: This provision of ARPA is, in our view, the most significant federal pre-emption of state tax policy in history. For the next three years, legislators and tax administrators alike will be scrutinized as their tax policy decisions are evaluated through the lens of this prohibition. This level of congressional control over state tax policy decisions and fiscal autonomy likely violates the Tenth Amendment of the US Constitution and would dismay the framers’ basic notions of federalism.

While Congress has the ability to limit the use of federal funds in ensuring its policy goals are accomplished, the overly broad state tax limitation adopted by Congress goes far beyond its stated purpose and prevents states from furthering ARPA’s goals by using tax policy to craft their own COVID-19 relief measures. Any regulation or administrative interpretation that reduces state tax revenue or delays the implementation of a tax is, effectively, barred by the unprecedented intrusion into state tax policy-making.

The effects of ARPA’s state tax limitation are immediate and far-reaching. It will chill continuing state efforts to couple/decouple state tax codes to or from the Tax Cuts and Jobs Act of 2017. Additionally, ARPA already stalled legislation pending in Maryland that would delay, for one year, implementation of its digital advertising services gross receipts tax, restoring return filing and tax [...]

Continue Reading




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.




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 (i.e., Form QHTC-CERT) to each applicable tax return or claim for refund. See DC Mun. Regs. tit. 9, § 1101 (prior to Jan. 4, 2019). Effective January 4, 2019 with the finalization of the amended regulation, this procedure now requires every QHTC to submit a Self-Certification request online via MyTax.DC.gov on an annual basis and obtain a “certificate of benefits” letter from OTR each year. No tax exemptions or benefits will be allowed without a valid certificate of benefits letter that is obtained prior to or concurrently with the filing of a return on which the benefits are claimed. Thus, to claim QHTC benefits on a monthly sales tax return for January 2019, the certificate of benefits will need to be requested from OTR for review/processing prior to the upcoming mid-February return deadline. Unlike the procedure in the past, the certificate of benefits letter obtained online will be deemed to attach to any tax return due and filed during the period for which the certificate is valid and unexpired. The certificate of benefits is expected to be valid for one (1) calendar year from the date it is issued/approved by OTR. Unlike prior years, the new regulation requires all benefits applications filed by a QHTC to include all of the following information:

  1. Taxpayer ID Number
  2. Name
  3. Address
  4. Sales Tax Account Number
  5. NAICS Code
  6. Information demonstrating QHTC eligibility (including attaching proof of DC office location, such as a current lease agreement)
  7. First year certified as QHTC
  8. Explanation of principal business activity
  9. Amount of QHTC Exempt Sales/Purchases from the prior year (broken down by period)
  10. Number of QHTC employees hired
  11. Number of QHTC employees hired who are District residents
  12. Schedules detailing QHTC employee credits
  13. Number of QHTC jobs created in the past year
  14. Gross revenue
  15. Gross revenue earned from QHTC activities in the District

Practice Note: Companies that have historically claimed one or more of the tax benefits available to QHTCs and wish to continue to do so in 2019 need to carefully review [...]

Continue Reading




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.

  1. 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.
  2. 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.
  3. Minnesota: will abide by customary lookback periods of 3 years for sales/use tax and 4 years (3 look-back years and 1 current year) for income/franchise tax. Minnesota will grant shorter lookback periods to the time when the marketplace seller created nexus.
  4. Missouri: prospective-only for sales/use and income/franchise tax.
  5. North Carolina: prospective-only for sales/use and income/franchise tax. North Carolina will consider applications even if the entity had prior contact concerning tax liability or potential tax liability.
  6. Tennessee: prospective-only for sales/use tax, business tax and franchise and excise tax.

Practice Note

The MTC marketplace seller initiative is now up to 24 participating states. It is targeting online marketplace sellers that use a marketplace provider (such as the Amazon FBA program or similar platform or program providing fulfillment services) to facilitate retail sales into the state. In order to qualify, marketplace sellers must not have any nexus-creating contacts in the state, other than: (1) inventory stored in a third-party warehouse or fulfillment center located in the state or (2) other nexus-creating activities performed by the marketplace provider on behalf of the online marketplace seller.

While Missouri, North Carolina and Tennessee have signed on to the attractive baseline terms (no lookback for sales/use and income/franchise tax), Minnesota and Massachusetts are requiring their standard lookback periods (i.e., 3+ years). Thus, these two states (similar to Wisconsin) are not likely to attract many marketplace sellers. The District of Columbia’s noncommittal case-by-case offer leaves a lot to be determined, and their ultimate offer at the end of the process could range from no lookback to the standard three years.




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) tax liability for sales and use and income/franchise tax, including waiver of penalties and interest. The program also attempts to ensure confidentiality of the 3P seller’s participation by prohibiting the states and MTC from honoring blanket requests from other jurisdictions for the identity of taxpayers filing returns. Note, however, that the confidentiality provision would still allow for disclosure of the content of the agreement in response to: (1) an inter-government exchange of information agreement in which the entity provides the taxpayer’s name and taxpayer identification number; (2) a statutory requirement; or (3) a lawful order.

(more…)




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 to those businesses that have been awarded grants but have not received grant payments. The law, unfortunately, was short on details.

Businesses that wish to take advantage of the grant conversion must elect to convert the grant into a tax credit by July 11, 2016. Once the election is made, it is irrevocable.

Because a business cannot predict with any certainty whether the New Jersey legislature will fund the Program in future years, a business has to decide whether to opt to convert its grant. If a business does not elect to convert its grant, it risks losing all of its unpaid BEIP grants. On the other hand, if a business makes the election and the Program is funded in future years, the business will have no choice but to receive tax credits even though a cash payment might be more valuable to the business.

If a business elects to convert its grant commitments to tax credits, the credits will be issued over a period of years as set forth in the statute.   This delayed payment means that the business will suffer an additional loss of money owed by New Jersey on account of the time value of money. The statute provides that the BEIP tax credit must be used in the designated years and may not be carried forward. The credit is a priority credit and should be applied before all other credits. Accordingly, it is important to consider whether the other credits claimed by a business are refundable when deciding whether to make the election and calculating the potential benefit of conversion.

In anticipation of the July 11, 2016, deadline for businesses to opt to convert their grant into a tax credit, the Authority has provided guidance on how to make the election. This guidance, as mentioned above, is informal and not a regulation. The guidance provides that to make the election, a business must submit an executed Amendment to Agreement. The form Amendments to Agreement for different tax types are available on the Authority’s website.  Once a business opts to convert [...]

Continue Reading




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 “unreasonable and [the Department’s] denial of the applications based on that directive was unlawful.” (more…)




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 Associated Press, states have provided about $1.5 billion in data center tax breaks over the past 10 years.[2]   Some states have gone even further, providing tax incentives to the entire data center industry through changes in the tax laws themselves. Such incentives can include reductions or exemptions from sales and use taxes on data center products or services, favorable income tax rates for data center companies and favorable property tax rules for data center assets. According to a recent analysis by the Associated Press, at least 23 states provide such statutory data center tax incentives.[3] Just a few of the most recent examples include a sales tax exemption for data center equipment in Michigan,[4] a broadening of the sales tax exemption for data center electricity and equipment in North Carolina[5] and a favorable apportionment formula for data centers in Virginia.[6]  Importantly, many of these incentives apply not only to the data centers themselves, but also to their customers.

Businesses considering whether to take advantage of these incentives would be well advised to consider not only the potential benefit from any particular tax incentive, but also whether the decision would affect their tax picture as a whole. Because of the current uncertain and changing landscape for state and local taxation of technology and computer services, the analysis of these incentives for data centers and their customers can be particularly complex.

One item that a taxpayer might overlook when considering whether to take advantage of an incentive program is what affect, if any, the choice of location might have on the taxpayer’s property factor for income tax apportionment purposes. Obviously, location of a company’s technology equipment in a data center under a colocation agreement will cause the company’s in-state property factor to increase due to its equipment being located in the state. However, data center customers also should be aware that local tax authorities might also argue that the colocation payments themselves constitute consideration for the use of real or tangible personal property and thus the [...]

Continue Reading




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 fact due and whether they qualify under the loose terms outlined in the Bulletin (discussed in detail below). It should be noted at the outset that the guidance (and accompanying VDA offer) do not relate to the City’s amusement tax, which has also been of concern after a ruling was issued this summer interpreting the tax to apply to streamed digital content.

VDA Offer Terms

The most significant component of yesterday’s guidance is the VDA offer beginning on page 6 of the Bulletin. While the VDA may seem enticing, we encourage providers and customers alike to proceed with caution as the practical application of the ambiguous (and discretionary) terms are tainted with uncertainty.

As a threshold to qualifying, the provider or customers must qualify (i.e., be a qualified discloser) for the City standard voluntary disclosure program. Under the standard program, a taxpayer must not be under audit or investigation (i.e., has not received a written notice relating to an audit or investigation for the tax at issue) and must “waive their right to an administrative hearing or claim for refund or credit, and agree not to initiate or join any lawsuits for the payments made under the program.” This is significant because we believe a challenge to the Lease Tax is imminent and those that participate in the VDA program will not benefit if any such challenge is successful.

Even if a taxpayer is considered a qualified discloser under the standard program, to qualify for the more favorable Lease Tax offer providers and customers must file an application by January 1, 2016, and come into compliance with the Lease Tax Ordinance by the same date (or such later date that the Department may agree to). If all of these requirements are met, they will receive the following terms:

  1. As to charges for nonpossessory computer leases that qualified for Exemption 11 under the Department’s interpretation of the exemption before the issuance of Ruling #12, no liability for tax, interest or penalties based on those charges for [...]

    Continue Reading



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 are abated;
  • The provisions for recapturing abated taxes (e., clawbacks);
  • The types of commitments made by tax abatement recipients; and
  • Any other commitments made by the government as part of the agreements.

For tax abatements where a government has reduced its own revenue, disclosed information should be organized by each major tax incentive program. For incentives where one government’s revenue has been reduced by a different government’s abatement (e.g. a municipal property tax incentive reducing a school district’s revenue), disclosed information is based on the government that entered into the abatement agreement and the type of tax being abated.

Statement 77 permits the reporting government to decide whether to report the required information individually or in the aggregate. If agreements are disclosed individually, the government must establish a quantitative threshold to determine which agreements to disclose—it cannot disclose selectively. A reporting government is permitted to omit specific information if it is legally prohibited from disclosures, such as via state confidentiality laws or a confidentiality provision in the agreement itself.

The disclosure provisions of Statement 77 apply only to tax abatement agreements, which are negotiated agreements where a government agrees to forego tax in exchange for some benefit. Tax incentives that do not require an agreement are not affected. Negotiated grants or other non-tax incentives are also not affected.

Practice Note

Statement 77 will significantly change the world of incentives, particularly at the local level where negotiated agreements reducing property or sales taxes are common. The disclosures of the amounts of forgone revenue associated with tax abatement programs will provide ammunition to groups criticizing incentives, and gone are the days that The New York Times has to spend 10 months gathering state and local incentive data, as they did in 2012. Businesses should expect increased scrutiny during the approval process as governments become more sensitive to whether they are getting a “good deal.” Companies with existing agreements should also be concerned: local governments may seek to renege on their commitments as the costs become more apparent, particularly when new politicians come into office who were not part of the original deal.

One consideration in negotiating incentives [...]

Continue Reading




STAY CONNECTED

TOPICS

ARCHIVES