Tag: SALT

The Illinois Constitution and Taxes

The Illinois Constitution was adopted on December 15, 1970. The constitution sets forth the taxing powers of home rule units and describes the exclusive power of the General Assembly to raise revenue. Because the constitution creates the framework for how Illinois’ taxing system functions, this post will discuss the constitution’s general structure and the impact it has on Illinois taxes.

Background

In 1968, the people of Illinois called a constitutional convention to “modernize, shorten, and liberalize” its 1870 constitution. One of the advocates for the convention was Chicago mayor, Richard J. Daley, who sought two primary goals: (1) obtain constitution home rule power for the City of Chicago, and (2) to allow for classification of real property for ad valorem taxation purposes.[1] Another important motivating factor for revising the constitution was to abolish the state’s personal property tax, which was generally seen as disproportionately affecting downstate taxpayers as compared to those located in Chicago.[2] At the end of the convention, the state voted to adopt the constitution.

The Illinois Constitution of 1970 is composed of fourteen articles. Article VII relates to “Local Government,” Section 6 of which is dedicated to describing the powers of home rule units. Article IX describes the General Assembly’s revenue power. These two sections are the most important in understanding the constitutional constraints on Illinois tax.   

Powers of Home Rule Units

As we have discussed with respect to Chicago and Cook County, the Illinois constitution grants home rule authority to counties and municipalities which have a population of more than 25,000.[3] Other municipalities may elect by referendum to become home rule units or, alternatively, home rule units may by referendum elect not to be a home rule unit. To the extent home rule county ordinances conflict with municipality ordinances, the municipal ordinance will prevail.[4]   

Although home rule units appear to have plenary authority, the constitution does limit their powers. Home rule units only have the power granted by the General Assembly “to license for revenue or impose taxes upon or measured by income or earnings or upon occupations.”[5] Moreover, the General Assembly may limit home rule power to tax where the General Assembly approves such preemption by a three-fifths vote.[6] Otherwise, home rule units may exercise and perform concurrently with the state any power or function of a home rule unit to the extent the General Assembly does not specifically limit the home rule unit’s exercise of such powers or specifically declare the state’s exercise of a similar power to be exclusive.[7]

These constitutional revisions “drastically altered the balance of power between [Illinois] state and local governments, giving local governments greater autonomy.”[8] Indeed, the Illinois Supreme Court has explained that these provisions were “drafted with the intent to give home rule units the broadest power possible under the constitution.”[9] Nonetheless, the three most meaningful limitations on home rule units contained in the constitution are that home rule units may not license for revenue, impose income taxes, or impose occupation taxes without the explicit grant of authority from the General Assembly. 

While Illinois courts have been somewhat hesitant to strike down home rule taxes on the basis that such taxes are impermissible occupation taxes, the Illinois Supreme Court, in 1982, struck down a City of Chicago tax which taxed certain services.[10] The court explained that delegates from the constitutional convention “saw the occupation tax as a corollary to the sales tax which would extend that tax to services, and […] equated the occupation tax with a tax on services.”[11] Thus, generally speaking, home rule units may only impose taxes on services to the extent permitted by the General Assembly. 

State Revenue Power

The General Assembly has the exclusive power to raise Illinois revenue except as limited or otherwise provided by the Constitution. The General Assembly may not surrender, suspend, or contract the power to tax away.[12] Similar to many other states, Illinois has a “Uniformity Clause,” which states that “[i]n any law classifying the subjects or objects of non-property taxes or fees, the classes shall be reasonable and the subjects and objects within each class shall be taxed uniformly.  Exemptions, deductions, credits, refunds and other allowances shall be reasonable.”[13]

The Illinois Constitution also dictates that any income taxes must be at one set rate and may not be graduated. Moreover, income taxes may only be imposed once on individuals and corporations, but tax rates imposed on corporations may differ from tax rates on individuals, so long as corporations are not taxed at a ratio greater than 8 to 5 when compared to individual tax rates.[14] A number of constitutional amendments have recently been proposed to amend the constitution to allow for a progressive income tax.[15]

Another important aspect of the Illinois Constitution is that counties with a population of more than 200,000 may classify real property for purposes of taxation.[16] These classifications must be reasonable and assessment of tax must be uniform within each class. Moreover, real property used in farming in a county may not be assessed at a higher level of assessment than single family residential real property in the county.[17]

Finally, the constitution provides that the “General Assembly by law may classify personal property for purposes of taxation by valuation, abolish such taxes on any or all classes and authorize the levy of taxes in lieu of the taxation of personal property by valuation.”[18] The constitution required, on or before January 1, 1979, the General Assembly to abolish all ad valorem personal property taxes and to replace all revenue lost as a result by imposing statewide taxes on those classes relieved of the burden of paying ad valorem personal property taxes. To the extent such taxes are measured by income, “such replacement tax shall not be considered for purposes of the limitations of one tax and the ratio of 8 to 5” regarding personal and corporate income taxes. The resulting “replacement income tax” is imposed on corporations at a rate of 2.5% of the taxpayer’s net income and for S corporations, partnerships, and trusts, is imposed at a rate of 1.5% of the taxpayer’s net income.[19] The Illinois Supreme Court has confirmed that the constitution’s prohibition on personal property tax is permanent, and such taxes may not be resurrected in the absence of a constitutional amendment.[20]

Conclusion

The Illinois General Assembly retains a substantial amount of authority to structure the state revenue system as it desires. However, the 1970 Constitution provides home rule localities significant power to do the same absent preemption by the General Assembly.  Understanding this unique balance provides useful insight into how to navigate Illinois state and local revenue laws.

[1] Ann M. Lousin, Where are we at? The Illinois Constitution after Forty-Five Years, 48 J. Marshall L. Rev. 1 (2014).

[2] Id; see also Client Follow-Up Co. v. Hynes, 75 Ill. 2d 208 (1979).

[3] Ill. Const. Art. VII, Sec. 6. 

[4] Id. at (c).

[5] Id.  at (e).

[6] Id. at (g).

[7] Id. at (i).

[8] Blanchard v. Berrios, 410 Ill. Dec. 923, 923 (2016) (internal quotation removed); City of Chicago v. StubHub,Inc., 366 Ill. Dec. 43 (2011).

[9] Id. (internal quotations omitted). 

[10] Commercial Nat’l Bank v. Chicago, 89 Ill. 2d 45 (1982). 

[11] Id. at 54-55 (internal quotations omitted).

[12] Ill. Const. Art. IX, Sec. 1.

[13] Id. at Sec. 2.

[14] Id. at Sec. 3.

[15] See Senate Joint Resolution Constitutional Amendments 1, 16, and 39.

[16] Ill. Const. Art. IX, Sec. 4.

[17] Id.

[18] Id. at Sec. 5.

[19] 35 ILCS 5/201(d).

[20] Client Follow-Up Co., 75 Ill. 2d 208.© Horwood Marcus & Berk Chartered 2018. All Rights Reserved.

This post was written by of  Christopher T. Lutz of  Horwood Marcus & Berk Chartered 2018. All Rights Reserved.

Illinois Adopts A New Remote Seller Nexus Law

We should have a Wayfair decision by then, but IL adopted a South Dakota remote seller nexus rule effective October 1, 2018.

For purposes of the Use Tax Act, the definition of “retailer maintaining a place of business in this state” is amended, and for purposes of the Service Use Tax Act, the definition of “serviceman maintaining a place of business in this state” is amended. Beginning October 1, 2018, such a retailer will include a retailer making sales of tangible personal property and a serviceman making sales of service to purchasers in Illinois from outside of Illinois if the cumulative gross receipts from sales of tangible personal property and sales of service to purchasers in Illinois are $100,000 or more, or the retailer or serviceman enters into 200 or more separate transactions for the sale of tangible personal property or sales of service to purchasers in Illinois. The retailer or serviceman will determine on a quarterly basis, ending on the last day of March, June, September, and December, whether he or she meets this criteria for the preceding 12-month period. If the criteria are met, the individual is considered a retailer or serviceman maintaining a place of business in this state and is required to collect and remit use tax or the service use tax, respectively, and file returns for one year. At the end of the 1-year period, the retailer or serviceman will determine whether he or she met the criteria during the preceding 12-month period, and, if so, the individual is considered a retailer or serviceman maintaining a place of business in this state and is required to collect and remit use tax or the service use tax, respectively, and file returns for the subsequent year. If at the end of a 1-year period a retailer or serviceman that was required to collect and remit use tax or service use tax, respectively, determines that he or she did not meet the criteria during the preceding 12-month period, the retailer or serviceman subsequently will determine on a quarterly basis, ending on the last day of March, June, September, or December, whether he or she meets the criteria for the preceding 12-month period.

 

© Horwood Marcus & Berk Chartered 2018. All Rights Reserved.

Tax Amnesties Popping up…and should be taken seriously!

Alabama, Connecticut and Texas are offering tax amnesty programs that have some huge benefits. Amnesty programs are a great way to resolve nexus issues and underpayment issues. As with most amnesty programs, you must not have been contacted by the respective state’s Department of Revenue to be eligible.

In Alabama, the amnesty period runs from July 1, 2018 through September 30, 2018. It includes most tax incurred or due prior to January 1, 2017 and includes a full waiver of interest and penalties.

Connecticut’s program is already open and runs through November 30, 2018. Connecticut’s amnesty program includes periods up through December 31, 2016. Connecticut will waive all of the penalty and 50% of any interest due.

Texas will offer an amnesty for most taxes due prior to January 1, 2018. The amnesty period runs from May 1, 2018 through June 29, 2018 and includes full penalty and interest waivers.

 

© Horwood Marcus & Berk Chartered 2018.
This post was written by Jordan M. Goodman of Horwood Marcus & Berk Chartered.

Navigating a Cook County Department of Revenue Audit and the Procedure for a Formal Protest

A recent national trend in the practice field of state and local tax has been the uptick in local jurisdictions’ audit activity. The Cook County Department of Revenue (“Cook County” or “Department”) is no exception to this trend where in recent years, the Department has increased its audit activity, and much to the chagrin of taxpayers, has taken aggressive positions in the interpretation of its tax ordinances. Consequently, this has led to increased litigation in the administrative proceedings before the Cook County Department of Administrative Hearings (“D.O.A.H.”). This post provides an overview of the Department’s audit and ensuing D.O.A.H. processes and will highlight some of the procedural differences compared to other jurisdictions such as Chicago and Illinois. This background should assist any taxpayer in navigating the pitfalls and traps they will likely face if they receive a notice of Tax Assessment and Determination (“Assessment”).

Authority to Tax

The Illinois Constitution grants a home rule unit, which includes a county that has a chief executive officer elected by electors of the county, with authority to exercise any power and perform any function pertaining to its government and affairs, including the power to tax.  Ill. Const. Art. VII, § 6(a), 55 ILCS 5/5-1009. For taxes that are measured by income or earnings or that are imposed upon occupations, Cook County only has the power provided by the General Assembly.  Ill. Const. Art. VII, § 6(e). Cook County, however, is not preempted from imposing a home rule tax on (1) alcoholic beverages; (2) cigarettes or tobacco products; (3) the use of a hotel room or similar facility; (4) the sale or transfer of real property; (5) lease receipts; (6) food prepared for immediate consumption; or (7) other taxes not based on the selling or purchase price from the use, sale or purchase of tangible personal property.  55 ILCS 5/5-1009.

Audit Overview

Cook County, like the Illinois Department of Revenue and the City of Chicago Department of Finance, initiates an audit by issuing an individual or business a notice of audit to the taxpayer. The notice will generally identify the taxes subject to review, the periods under audit, and the time and location where the Department will undertake the audit. The notice will likely also include document requests and/or questionnaires that the Department has requested to review as part of audit. In some instances, however, if the Department believes that a taxpayer is not reporting a tax that the Department believes it is subject to, the Department will skip the audit and issue a “jeopardy assessment.” A jeopardy assessment assesses liability based on the books and records of who the Department deems to be similarly situated taxpayers.

Additionally, as my colleague Samantha Breslow discussed in ” Navigating a Chicago Audit and the Procedure for a Formal Protest“, taxpayers should take the Department’s information requests seriously.  It is especially important that the taxpayer stays engaged and responsive to Department auditors as a failure to do so may result in the Department issuing a jeopardy assessment. Cook County Code of Ordinances (“C.C.O.”) § 34-63(c)(2).[1]

Protest

While the Department’s audit process is very similar to Illinois, Chicago, and most other jurisdictions for that matter, the Department’s tax appeals process differs significantly. Unlike the Chicago Department of Finance which affords taxpayers 35 days to protest a notice of tax assessment, and the Illinois Department of Revenuewhich affords taxpayers 30-60 days to protest a notice of tax assessment, a taxpayer subject to a Department tax assessment must file its protest within 20 days of the Department’s mailing the notice of tax determination and assessment. C.C.O § 34-80. The taxpayer must either personally serve the Department with its protest, or place its protest in an envelope, properly addressed to the Department and postmarked within twenty days of the Department’s mailing of the protest. C.C.O. 34-79. At a minimum, a protest must identify the date, name, street address of the taxpayer, tax type, tax periods, the amount of the tax determination and assessment, and the date the county mailed the notice of assessment. The protest should also include an explanation of reasons for protesting the assessed tax and penalties. The Department has published a ” Protest and Petition for Hearing” form which must be used by a protesting taxpayer.  The form must be signed, and must include a power of attorney if the taxpayer is represented by someone other than the taxpayer.

Taxpayers should pay attention to the extremely short time frame in which to a protest must be filed. When considering the Department is only required to serve this notice by United States registered, certified or first class mail, a taxpayer is often left with less than 15 calendar days to file its protest. This is especially true for corporate taxpayers whose headquarters may differ from the address of its tax or legal department or the individual responsible for protesting tax assessments.

Administrative Proceedings

Upon timely receipt of a taxpayer protest, the Department will determine whether any revisions to the Assessment are warranted. This stage may result in a continuation of the audit where the Department will request additional documentation from the taxpayer and the Director of the Department does have the authority to amend the Assessment. While nothing prohibits the Department from increasing the Assessment during this stage, generally if a revision to the Assessment is made, the result is a reduction in the Assessment.[2]

If the parties are unable to resolve the audit, the Department then institutes an administrative adjudication proceeding by forwarding a timely filed protest to the D.O.A.H. C.C.O. § 34-81; C.C.O. § 2-908. The Director of the D.O.A.H. is appointed by the President of the County Board, and is subject to approval by the County Board of Commissioners. C.C.O. § 2-901(b).The Director appoints hearing officers, or administrative law judges (“ALJ”), who are independent adjudicators authorized to conduct hearings for the Department.C.C.O. § 2-901(a). The ALJ has authority to hold settlement conferences, hear testimony, rule upon motions, objections and admissibility of evidence. C.C.O. § 2-904. Note, however, the ALJ is prohibited from hearing or deciding whether any ordinance is facially unconstitutional. C.C.O. § 34-81.

At all proceedings before the ALJ, the Department will be represented by the State’s Attorney. The ALJ will set the matter for an initial pre-hearing status where the parties should be prepared to provide the ALJ with a brief overview of the facts and issues in dispute. The parties will then work to narrow the issues for presentment of findings by the ALJ. This will likely be accomplished by pre-hearing motion practice and the parties’ attempt to stipulate to facts and legal issues to be decided by the ALJ. Ultimately, the taxpayer and the Department will participate in a hearing, or trial, before the ALJ prior to the ALJ issuing a final order with findings of fact and conclusions of law. C.C.O. §  2-904.

Most taxpayers and practitioners are surprised to learn that the D.O.A.H. has no formal discovery. In fact, the parties are only entitled to conduct discovery with leave of the ALJ. Cook County D.O.A.H. General Order No. 2009-1 (“General Order”), Rule 6.3.In our experience,the ALJ will occasionally permit limited interrogatories and requests to admit, but requests to produce have been denied, and depositions arestrictlyprohibited. This is true even where a party intends on introducing an expert witness at the hearing.  Notably, because the Illinois Supreme Court rules do not apply, there is also no corresponding requirement that an expert submit its conclusions and opinions of the witness and bases thereof to the adverse party. See  Ill. S. Ct. R. 213(f). The ALJ may subpoena witnesses and documents which the ALJ deems necessary for the final determination. General Order, Rule 6.4. The lack of procedure naturally increases the likelihood of surprise at final hearing.

After the completion of any pre-hearing motions and the narrowing of the issues, the parties proceed to a hearing where each party will present its case. This is where the record is made for purposes of appeal. No additional evidence is permitted to be introduced at the Circuit Court. The Petitioner, often the Department, must present its case first and bears the initial burden.[3] However, the Department’s Assessment is deemed to be prima facie correct. C.C.O. § 34-64.Thus, a taxpayer has the burden of proving with documentary evidence, books and records that any tax, interest or penalty assessed by the Department is not due and owing.  C.C.O. § 34-63. The formal and technical rules of evidence do not apply at the hearing. C.C.O. § 2-911. A taxpayer can also present fact and expert witnesses in support of its position and may wish to call Department personnel such as the auditor and supervisor as adverse witnesses to support its case.

After both parties have concluded their case, each may request an opportunity to present a closing argument. General Order, Rule 9.4. In lieu of, or in addition to a closing argument, the ALJ may request the parties to file post hearing briefs. It is during the closing argument and/or brief, that the parties will have the opportunity to present its legal and factual defense to the Assessment.

After the hearing and review of post-trial briefs, the ALJ will issue a final order which includes findings of fact and conclusions of law. The findings of the ALJ are subject to review in the Circuit Court of Cook County pursuant to the Administrative Review and the aggrieved party has 35 calendar days to file an appeal. C.C.O. 2-917.

Conclusion and Takeaways:

The D.O.A.H. presents some unique litigation and procedural challenges for a taxpayer wishing to protest a Department Assessment. The major takeaways for a taxpayer protesting an assessment are (1) a taxpayer must file its protest within 20 days of the Department’s mailing of the assessment; (2) the D.O.A.H. has limited discovery rules and prohibits the use of depositions which can inhibit a taxpayer’s ability to build a case. Accordingly, a taxpayer must present adequate witnesses and documentation to support its case at hearing; and (3) a taxpayer must build a record at the administrative proceeding because it will be foreclosed from doing so at the circuit court if an appeal is necessary. These takeaways can go a long way in assisting a taxpayer’s chances of success in what is at times, an unpredictable venue.

[1] If a Taxpayer believes that it has paid a prior amount of tax, interest, or penalty in error to the department, in addition to amending its return, the taxpayer must file a claim for credit or refund in writing on forms provided by the Department. Cook County Code of Ordinances (“C.C.O.”) § 34-90.  The claim for refund must be made not later than four years from the date on which the payment or remittance in error was made. Id.  

[2] If the assessment is revised, the Taxpayer should determine whether the revisions are documented in an official “Revised Notice of Assessment and Determination” or alternatively, whether the revisions were documented in something less formal such as revised schedules or workpapers.  If it is the former, while the Ordinance does not expressly require an Amended Protest to be filed, the issue of whether a revised protestmust be filedwithin 20 daysof the Revised Assessment has been raised in administrative proceedings before the Department. 

[3] We have seen instances where the Taxpayer is identified as the Petitioner in the captioned matter.  In fact, the Taxpayer is identified as Petitioner in the Department’s Protest and Petition for Hearing Form.  However, because the Department submits the matter to DOAH, the taxpayer has no choice on whether it is identified as Petitioner or Respondent in the proceeding, and the Department’s inconsistency often leads to confusion regarding burden of proof issues.

 

© Horwood Marcus & Berk Chartered 2018. All Rights Reserved.
This post was written by David W. Machemer of Horwood Marcus & Berk Chartered 2018.

January 2015 State Tax Credit and Incentive Update–SALT

Horwood Marcus & Berk Chartered Law Firm

This is the first in a monthly series outlining updates in state tax credits and incentives, including but not limited to legislative, gubernatorial and case law updates as well as recent announcements of credit/incentives packages. While we recognize that tax credits and incentives are often frowned upon by tax policy experts, they are seen as necessary by state and local governments. Why? The reason is simple — state and local governments are focused on creating jobs and encouraging investment within their borders, and they must compete with surrounding states for those jobs and investment, most of which also offer tax credits and incentives. The good news for both corporate taxpayers and non-profit entities is that state tax credits and incentives are available and can benefit a business in many ways.

Recent Announcements of Credit/Incentives Packages

A review of recent package announcements shows the breadth of the potential packages available to a large variety of companies for investing in the state, creating new jobs and in some cases, simply retaining jobs.

California: On January 15, 2015, the California Governor’s Office of Business and Economic Development (GO-Biz) announced that pursuant to its new California Competes Tax Credit Program it approved approximately $31 million in tax credits for 56 companies projected to create roughly 4,900 jobs and generate over $900 million in investment in the state. One company involved is Neustar, Inc. which provides cloud-based information and data information services. Over the course of 5 years, the company is expected to create 264 full-time jobs and invest $2.5M in the state. The total tax credits allocated over the course of 5 years is $1.5M.

Connecticut: Connecticut announced in December 2014 that local municipal and tax-exempt organizations will collect more than $5.8 million for community projects as a result of the state’s Neighborhood Assistance Act Tax Credit Program. Each year, up to $5 million in corporate income tax credits are available to businesses that make donations to community agencies and programs identified by municipalities. Businesses can apply for the credit after pledging donations for endeavors that include community service, food banks, energy assistance, literacy, and programs for people with special needs.

Kentucky: Gov. Steve Beshear on January 12, 2015, announced the opening of the global headquarters of food processing developer Avure Technologies Inc. in northern Kentucky. The company was approved for tax incentives of up to $300,000 through the state’s business investment program and is expected to create 16 jobs and invest $3 million in the state.

Maryland: Gov. Martin O’Malley announced in December 2014 that $10 million in state tax credits will fund 9 historic restoration projects across the state, leveraging private investment of nearly $76.7 million as part of the Sustainable Communities Tax Credit program administered by the state planning department’s Maryland Historical Trust. One such project involves Taylor’s Furniture Store which will rehabilitate a retail and residential building for use as restaurant and office space. The credit amount is $150,000 and the estimated project cost is $750,000.

Massachusetts: In December 2014, the Massachusetts Economic Assistance Coordinating Council announced the approval of 18 business projects for the state’s Economic Development Investment Program, the state’s investment tax credit program for businesses. The projects are expected to create nearly 1,700 new jobs, retain about 4,500 existing jobs, and leverage over $342 million in private investment and supporting construction projects. One credit award winner is Golden Fleece Manufacturing Group LLC, doing business as Southwick/Brooks Brothers Group Inc., which plans to expand its site, boost the number of suits it produces, retain 468 full-time jobs, and create 70 new full-time jobs. The business will invest $16 million in renovation and other costs; and the city of Haverhill will provide a 20-year tax increment financing and personal property tax exemption agreement valued at about $4.4 million.

Michigan: In a January 14, 2015, press release, the Michigan Economic Development Corporation announced the expansion of Android Industries in Detroit; the company was approved by the city council for an industrial facilities tax exemption valued at $620,000 and is projected to generate $16.5 million in new private investment and to create 131 jobs.

In a January 27, 2015, news release, the Michigan Economic Development Corporation announced the Michigan Strategic Fund approved a local hotel development project and expansions of Forest River Manufacturing and Toyota in the state; the projects are expected to generate investment of $90.1 million and will receive grants and property tax abatements.

Ohio: On January 26, 2015, Governor John R. Kasich announced the approval of assistance for 14 economic development projects set to create 662 jobs and retain 1,739 jobs statewide. Collectively, the projects are expected to result in $32,570,620 in new payroll, and spur approximately $81.8 million in investment across Ohio. One company that was approved for assistance is Metcut Research Associates Inc. and Cincinnati Testing Laboratories, Inc. who is expected to create 15 full-time positions, generating $875,000 in additional annual payroll and retaining $10 million in existing payroll as a result of the companies’ expansion projects in the cities of Cincinnati and Forest Park. Metcut Research Inc. and its subsidiary Cincinnati Testing Laboratories conduct independent materials engineering and testing. Ohio approved a 35% five-year Job Creation Tax Credit for this project.

States’ Evaluation and Review of Credit and Incentive Programs

Multiple Jurisdictions: According to research published on January 21, 2015, by Pew Charitable Trusts, ten states and the District of Columbia have in the last 2 years enacted or strengthened laws requiring them to evaluate the effectiveness of their tax incentives. The ten states identified by Pew Charitable Trusts are Alaska, Florida, Indiana, Louisiana, Maryland, Mississippi, New Hampshire, Oregon, Rhode Island, and Washington.

Continuing the trend from the last 2 years, in recent months, several different states proposed or announced plans to review their credit and incentive programs:

California: SB 1335 (approved by the Governor in September 2014 and chaptered “845”) requires that any legislation proposing an income tax credit detail the goals of such a credit and provide performance indicators with which to measure its success.

Georgia: On January 26, 2015, a dozen Georgia Democratic senators introduced SR 65 that would create a tax exemption study committee to examine the effectiveness of economic development tax credits in the state.

Nebraska: In a report issued on December 11, 2014, a Nebraska legislative committee (Unicameral Legislature’s Tax Incentive Evaluation Committee) recommended that the state overhaul its system for evaluating its tax incentive programs, specifically recommending that the Legislative Audit Office, assisted by the Legislative Fiscal Office, evaluate the state’s incentive programs every three years.  Currently, Nebraska has no formalized process for evaluating tax incentives.

New Mexico: On January 14, 2015, the New Mexico state auditor announced his plan for a new government accountability office that will evaluate how equitably and effectively the state uses its tax dollars, including assessing the value of the state’s tax incentive programs.

Washington: HB 1239, introduced on January 15, 2015, in the Washington Legislature, would require more accountability for tax expenditures by requiring that they be reviewed for renewal or sunset as part of the biennial omnibus appropriations bill.

Legislative and Gubernatorial Update

Iowa: Gov. Terry Branstad, in his January 16, 2015, inaugural address, called for an angel investor tax credit to foster innovation and the growth of start-up companies.

Maryland: On January 22, 2015, Gov. Larry Hogan announced his $16.4 billion budget for fiscal 2016, including $12 million in biotechnology tax credits, $9.4 million to stem cell technology, and $2.5 million in investments and tax credits to promote cyber security research.

New Mexico: In her January 20 State of the State address, New Mexico Gov. Susana Martinez proposed targeted tax relief to reduce the personal income tax burden on small business owners who are just starting out and hiring new employees, incentives for moving headquarters to the state, and a $50 million closing fund for economic development projects.

Rhode Island: Rep. Joseph Shekarchi reintroduced on January 15, 2015, a bipartisan bill (H 5116) that would offer businesses that create new jobs in the state a reduction in their income tax rates. The Rhode Island New Qualified Jobs Incentive Act would offer tax incentives to companies that hire new full-time employees to work a minimum of 30 hours per week, with an annual salary between $35,100 and $46,800. Larger companies would be eligible for a 0.25% reduction in their net income tax rate for every 50 new hires. Smaller companies, defined as those with fewer than 100 employees, would receive a 0.25% reduction in their personal income tax rate for every 10 new hires.

Virginia: On January 23, 2015, SB 1447 was introduced in the Virginia Senate aimed to attract investments from companies that used inversions to reduce their federal tax liabilities. Specifically the bill would amend the state’s corporate income tax statute to permit a $5 million exemption for companies that used an inversion transaction to lower their U.S. tax liability. The exemption would be available beginning in tax year 2016 for qualifying companies that make a $5 million capital investment in Virginia to open a facility or other business operation, and it would be valid for the first five years of the facility’s or business’s operation.

Case Law Update

Illinois: On January 9, 2015, the Illinois Policy Institute filed a lawsuit in Sangamon County Circuit Court alleging that businesses should receive tax credits under the Edge Development for a Growing Economy (EDGE) program only if they create new jobs in the state, not if they retain them (Docket No. 2015-MR-000016).

The EDGE program (35 ILCS 10/5-1 et seq) offers incentives to encourage companies to locate or expand their operations in the state when there is active consideration of a competing location in another state. If the business is eligible, the program provides tax credits equal to the amount of state income taxes withheld from the salaries of newly hired employees. In addition to locating or expanding in the state, businesses must agree to make an investment of $5 million in capital improvements and to create a minimum of 25 new full-time jobs. Small businesses, defined as those with 100 or fewer employees, must agree to make a capital investment of $1 million and create at least five new full-time jobs in the state.

The Illinois Department of Commerce and Economic Opportunity (DECO) adopted a regulation, 14 Ill. Admin. Code § 527.20, which awards tax credits when businesses retain jobs, not create them. The Chicago Tribune reported that since 1999, the state has awarded nearly $1 billion in tax incentives to businesses under the EDGE program, the bulk of which was for jobs retained.

New York: In a decision dated January 15, 2015, a New York Division of Tax Appeals administrative law judge (ALJ) determined that the tax department properly denied qualified empire zone enterprise refundable tax credits to two limited liability companies because the companies, by shifting employees from one LLC to another, failed to meet the employment requirement. DTA Nos. 824986; 824987; 824988; 824989; Matter of Leeds.

In this case, one of the entities was certified as a qualified empire zone enterprise (QEZE) in 2000, but did not seek benefits until 2006 and 2007. In 2002, the statute was amended to include an employment test which restricted the use of individuals from related persons in calculating the employment numbers in taxable years or base period. For both 2006 and 2007, the parties do not dispute that one of the entities used an employee who had been previously employed by a related party.

The petitioners argued that since QEZE certification was granted for a period of 15 years, they had the right to rely on the statutory language in effect as of date of certification as a QEZE and continuing until that certification expired.

The ALJ found that one of the entity’s QEZE eligibility merely made it eligible to receive the tax benefits, including real property tax credits. The entity’s entitlement to benefits had nothing to do with the administration of the Empire Zone program or the Legislature’s prerogative to modify the requirements for obtaining those benefits on a prospective basis.

Interesting Update

Finally, you can thank the Seth Rogen and James Franco controversial movie, The Interview, for these interesting tidbits. The recent hacking of Sony Pictures Entertainment resulted in the public release of large amounts of data about the company’s tax practices which show that studio executives at the highest levels are constantly tracking changes in the availability and use of film incentives. For instance, the materials show that the developers of a project often feel compelled to explain how the project can be located in a jurisdiction with favorable incentives, sometimes even before it is considered for production.

For instance, when producers wanted to revive a Vatican-themed television series that was rejected the year before, they recommended shooting at a location in London where a “highly favorable tax credit” could help bring the project’s budget into an acceptable range.

In addition, (1) in a series of e-mails, studio executives push for changes to a James Bond script that would maximize their eligibility for tax credits from Mexico; (2) an e-mail about an upcoming Steve Jobs biopic shows how tax-driven location decisions can be affected by casting decisions; and (3) a film about former National Security Agency contractor Edward Snowden was rejected after the French, German, and New York City incentives recommended by its developers failed to bring its budget down far enough.

ARTICLE BY

Jennifer Zimmerman
OF
Horwood Marcus & Berk Chartered