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 the amended regulation and OTR guidance to ensure the new certification process (including providing a laundry list of data not required historically) is understood and submitted in a timely manner. Those with questions about the new QHTC certification process or timing are encouraged to contact the authors.

On September 23, District of Columbia Council Chairman Mendelson introduced the Promoting Economic Growth and Job Creation Through Technology Act of 2014 (Bill 20-0945 , hereinafter the “Act”) at the request of Mayor Vincent Gray.  This marks the second time that the Council has considered the introduced language; it was originally included as part of the Technology Sector Enhancement Act of 2012 (Bill 19-747), but was deleted prior to enactment.  The Act would add a new provision to the D.C. Code (§ 47-1817.07a) to impose a lower tax rate on capital gains from the sale of an investment in a Qualified High Technology Company (QHTC) beginning in 2015.  The rate would be 3 percent as compared with the current rate of 9.975 percent for business taxpayers.  Notably the proposed provision is limited in scope and only applies when the following three elements are satisfied:

  1. The investment was held by the investor for at least 24 continuous months;
  2. The investment is in common or preferred stock or options of the QHTC Company; and
  3. During the taxable year, the investor disposed or exchanged of some or all of his or her investment in the QHTC.

As introduced, the proposed tax is explicitly applied “notwithstanding” any provision of the income tax statutes.

Good Thought, Poor Drafting

The intent of this legislation is clear, but the practical application is not.  As a threshold matter, the second element requires the investment to be “in common of preferred stock or options,” which by definition excludes partnerships and limited liability companies since only corporations can issue stock.  On its face, the language of the bill appears to be limited to investments in a QHTC organized as a corporation, despite the fact that other entities are eligible for QHTC status under D.C. law.  Therefore, limited partners and members investing in pass-through QHTC’s appear to fall outside the scope of the proposed legislation.

Second, by imposing a different rate on only a certain type of income and by taxing the gains notwithstanding any other provision of the income tax statute, the proposal fails to account for basic tax calculations necessary to arrive at taxable income in the District for a business taxpayer.  For example, the allocation and apportionment provisions would seem to be negated both practically and legally.   What part of a multistate taxpayer’s gain from a QHTC is subject to the 3 percent rate?  Is it all of the gain; an apportioned part of the gain – and if so, based on whose apportionment percentage?  What if the gain would have been categorized as non-business income and the taxpayer is a non-resident?  The answer is certainly not obvious from the legislation.  Similarly, how do a taxpayer’s losses, both in the current year and carried over, affect the amount of gain available to tax?  Can all of the losses be used against other types of income first?  Can the losses be used at all against the QHTC gain?

Third, how is a taxpayer notified that the gain qualifies for the special QHTC rate?  Similarly, are companies at risk for shareholder lawsuits if they fail to elect QHTC status?

Finally, existing constitutional and categorization problems with the QHTC designation complicate the special tax rate application.  Investors may find that what they thought was a QHTC is ultimately determined not to qualify or the whole designation is invalidated on constitutional grounds.  Or, the QHTC designation may actually be available to far more companies based on Commerce Clause objections to D.C.’s current standard and thus available to far more investors than D.C. anticipates.

Practice Note:  The Act would seem to apply only to direct investments in a QHTC organized as a corporation.  Many investors finance such business endeavors through holding companies and other investment vehicles.  Gains from sales of an interest in an entity owning a QHTC may not qualify for the special tax rate.  Taxpayers holding investments in any technology company operating in the District of Columbia are encouraged to contact the authors and discuss the effect this legislation would have on the taxation of their investment, if enacted.  The proposed legislation was referred to the Committee on Finance and Revenue immediately after introduction and is being closely monitored by the authors.