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California Film Tax Credit Expanded

According to the Sacramento Bee:

It’s a happy ending for California’s film and television tax credit. Gov. Jerry Brown will sign today the bill expanding the program to $330 million in annual production incentives for the next five years.

The effort to reverse declining film and television production in California faced doubts over its effectiveness in luring industry jobs back from other states. But after an intense lobbying effort by Hollywood – including a visit from stew aficionado Carl Weathers – Brown reached a deal with lawmakers more than tripling the five-year-old tax credit.

Brown will sign the legislation, which also replaces the program’s lottery system with a competitive application, at 10 a.m. at the legendary TCL (formerly Grauman’s) Chinese Theater in Los Angeles. No word on whether he’ll leave his handprints and signature alongside those of fellow Gov. Arnold Schwarzenegger.

Senator Hatch Discusses Extenders at U.S. Chamber of Commerce

Senator Orrin Hatch (R-Utah), the ranking Republican on the Senate Finance Committee, spoke to the U.S. Chamber of Commerce on Sept. 11. 2014. In that talk he discussed the reasons behind voting against the Senate tax extenders bill earlier this year, his commitment to see them passed, and his prediction that they would likely be passed during the lame-duck session after the November elections:

Now, I know that corporate inversions are the hot tax topic of the day. Still, I know there are other tax issues that have people in this room concerned, most notably the status of business tax extenders.

Anyone who’s paid attention to the saga surrounding the 2014 tax extenders package knows my position. I am committed to seeing it pass, as are virtually all Republicans in the Senate.

Unfortunately, as with the debate over corporate inversions, the tax extenders have been pulled into election-year politics and gamesmanship.

A few months ago, the Senate Democratic majority brought the extenders bill to the floor and tried to force it through without any consideration of any amendments – neither Republican nor Democratic amendments.

As the saying goes, that’s a dog that just won’t hunt.

The Senate Democratic Leadership, so desperate to protect their members from anything resembling a difficult vote, has turned the Senate into an amendment-free-zone.

The current Senate Majority Leader has acted to block amendments on 87 separate occasions – more than twice as many times as the previous six majority leaders combined.

Over the past year, the Senate has voted on only 11 Republican amendments. During that same time frame, Democrats in the House of Representatives – where the majority typically enjoys much greater control over the debate – have received votes on 176 amendments.

Senate Republicans are – for good reason, in my view – fed up.

So, we voted against cloture on the tax extenders bill, effectively delaying a final vote on the measure because weren’t allowed to offer any amendments. This was a particularly difficult vote for me as I had worked closely with Chairman Wyden to put the tax extenders package together in a bipartisan fashion.

But, in the end, I believe it is essential that the Senate minority stand up for the traditions and practices of the Senate, even if they aren’t so important to those in the majority.

At this time, the tax extenders package remains somewhat in limbo. We’ve made it clear to the Senate Democratic Leadership that we are more than willing to bring up and pass the extenders bill as soon as they agree to a fair and open amendment process.

Of course, with just a few legislative days left until the Senate recesses before the elections, it’s very unlikely that the extenders bill will pass before Election Day.

But, make no mistake, Republicans want to pass this legislation. We know how important these extenders are to the business community. We’re going to get it done. I’m confident that it will pass, likely during the lame duck session after the midterms.

IRS Wants Extenders Passed With Minimal Changes

Politico’s Morning Tax newsletter reports that the IRS is asking for tax extenders to be done without substantive changes:

KOSKINEN URGES CONGRESS TO PASS EXTENDERS WITH MINIMAL CHANGES. Our Brian Faler reports that IRS Commissioner John Koskinen on Wednesday urged Congress to approve the tax extenders with as few changes as possible, saying last-minute revisions would only complicate what already promises to be a hectic 2015 tax-filing season. “Obviously” lawmakers won’t deal with the extenders until after the November elections, but Koskinen said any substantive changes will force the agency to reconfigure its internal systems and mean many more questions from the public, uncertain about how the new provisions affect them.

The IRS is already struggling with tight budgets, he said, predicting that almost half of those calling the agency next year for assistance with their taxes won’t be able to talk to a live person. “To the extent that new tax legislation or changes in the way in the provisions that’s being extended are implemented make it more complicated for us,” said Koskinen.

California GO-Biz Announces Next Round of California Competes Credit

GO-Biz has posted an update memo detailing the California Competes application rounds for fiscal year 2014/15.

There will be three rounds with applications for the first round being accepted starting on September 29 and through October 27, 2014. Out of a total $151.1 million available for the year (which is more than five times the amount that was available in the inaugural round earlier this year), $45 million will be available in the first round. Applications for the second round will be accepted starting January 5, 2015 and due by February 2. That round will be for $75 million. Applications for the third round will be accepted starting on March 9, 2015 and will be due by April 6 for $31 million (plus any not allocated during earlier rounds).

Texas is Paying Attention to California Competes Program

The Dallas Morning News compares the California Competes Credit with Texas’ Enterprise Fund:

When California rolled out a $750 million plan this year to attract and retain businesses, many aspects mirrored longtime perks used by Texas, where officials love nothing more than stealing jobs from the Golden State.

For more than a decade, Gov. Rick Perry has touted the “deal-closing” Texas Enterprise Fund and other cash incentives as a “job-creation machine.” A fifth of the companies that Texas attracted during the last funding cycle, in 2011 and 2012, were based in California.

Now California is firing back. In the state’s first tax credit awards in June, more than 40 percent of the $29 million package went to companies that have gotten similar offers from Texas: Samsung, Petco and Amazon.

But as California embarks on a major effort to woo businesses, a decade’s worth of experience in Texas raises questions about the wisdom of buying jobs from corporations with taxpayer dollars.
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H.R. 5284: Another Permanent WOTC Proposal

Congressman David Jolly (R-FL) has introduced H.R. 5284 which would extend WOTC permanently. His bill, however, adds a new proposal where, for employers who hire qualified veterans, and train those veterans in “qualified computer services,” the credit with respect to those employees could be transferred to another taxpayer.

Don’t expect this bill to become law, but it is always interesting to see new ideas and have new supporters in Congress.

Congressman Schock Introduces Bill to Permanently Extend WOTC

Congressman Aaron Schock (R-IL) has introduced H.R. 5264 which will permanently extend WOTC.


Politico’s “Morning Tax” column included the following item about WOTC on Wednesday:

TIGTA: IRS LAX IN OVERSIGHT OF WOTC. The IRS doesn’t have the proper processes in place to verify eligibility for the Work Opportunity Tax Credit and claims are riddled with errors, the Treasury Inspector General for Tax Administration found in a report released yesterday.

The full Treasury Inspector General for Tax Administration (TIGTA) report can be found here.

While much of the substance of the report is redacted, Politico is clearly overstating the matter by saying that “claims are riddled with errors.”

Out of over 21,000 tax returns filed in 2012 claiming WOTC, TIGTA found only 759 claims “for which the IRS had information at the time the tax returns were processed that could have been used to identify these claims as questionable.” Examination of a sample of 77 of these claims found that 24 were “erroneous.” The report does not disclose what kind of indications existed to flag these particular claims as questionable. Indeed the report states: “Our scope was limited as a result of the IRS not requiring employers to provide any identifying information as to the individuals for whom the WOTC was being claimed. In addition, the IRS does not receive or maintain certification documentation.”

Therefore, the investigation regarding the validity of claims was not related to the qualification of employees claimed under the credit, nor the validity of documentation related to the certification process. IRS tax form 5884 includes a worksheet to enable taxpayers to calculate the credit, but unless arithmetic errors were present, the IRS does not have sufficient payroll data to assess accuracy of the form without further investigation.

TIGTA made three modest recommendations (some parts of which are redacted in the report):

1. To request more specific information regarding the individuals being included in the credit claim, similar to how claims for the New HIRE Retention Credit were filed (see IRS form 5884-B)

2. To modify tax publications to clarify how taxpayers should apply the tax credits when tax returns involve pass-through entities.

3. To modify tax publications to:

a. “Clearly and accurately advise taxpayers of where to submit form 8850″ in cases where the taxpayer operates in multiple states, or in cases where an employee lives in one state and works in another.

b. Advise taxpayers “that an approved certification must be received to be eligible to claim an individual for the WOTC.”

In other words, despite Politico’s characterization of the report, there seems to be very little to see here.

Partial Sales and Use Tax Exemption on Manufacturing and Research and Development Equipment in California

On July 1, 2014, a new California tax incentive went into effect. The provision allows certain companies involved in manufacturing and research and development, a partial exemption of sales and use tax on the purchase or lease of equipment used in the manufacturing process. The reduction is from the state tax rate of 7.5% down to 3.3125%.

This new initiative could significantly reduce sales tax on any qualified purchase. These purchases include machinery and equipment; equipment and devices used or required to operate, control, regulate, or maintain the machinery; pollution control items; and certain special purpose buildings and foundations.

Who qualifies?

• “Qualified Person” or entity who is primarily engaged (50 percent or more of the time) in certain types of business which may include but not limited to all forms of manufacturing, research and development (“R&D”) in biotechnology, and R&D in physical, engineering, and life sciences
• A qualified person means a person or entity who is primarily engaged (50 percent or more of the time) in those line of business listed in the North American Industry Classification System (NAICS) under Codes 3111 to 3399 and R&D NAICS Codes 541711 and 541712
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New California Competes Application Rounds Announced

GO-Biz has posted the schedule for the fiscal year 2014/2015 California Competes Credits. There will be three application periods:

1. To be determined (probably some time in September or October based on the announcement made at the previous committee hearing). This round will be for $45 million of the total available.
2. Beginning 1/5/2015 through 2/2/2015 for $75 million.
3. Beginning 3/9/2015 through 4/6/2015 for at least $30 million.

The committee hearings, which finalize the awards, will be held on:
January 15, 2015
April 16, 2015
June 18, 2015

Applications submitted during one round that are not approved will carry over to subsequent rounds within the fiscal year. The limit that no single credit can be more than 20% of the total available applies to the entire year, not the amount set in a given application period.

GO-Biz Cancels Support for Remaining California Competes Awardee

Over the weekend, GO-Biz sent the following email (also on their website) to parties interested in the California Competes Credit:

In light of recent questions received by the Governor’s Office of Business and Economic Development (GO-Biz) and given that the applicant, Ai California LLC is unable to provide a substantive response due to proprietary concerns, GO-Biz can no longer recommend Ai California LLC for the California Competes Tax Credit. Hence, the California Competes Tax Credit Committe meeting scheduled for June 30, 2014 at 10 a.m. has been cancelled.

The proposed credit for Ai California was opposed by the California Labor Federation at the California Competes Credit public hearing on June 19. The minutes for that meeting have been posted here.

California Competes Tax Credit Committee Meeting Report

The California Competes Tax Credit Committee met on Thursday to make final determinations on the 31 contracts recommended by GO-Biz. One awardee, Duarte Nursery, asked that their tax credit contract worth $250,000 be withdrawn from consideration. Since there is not enough time left in California’s fiscal year to replace Duarte, that amount of credit will be added to the $150 million available in the next fiscal year.

GO-Biz representatives announced that the date for the next round of applications would be announced on June 30 and would likely take place in September or October. There will likely be three or more rounds of applications for the 2014/2015 fiscal year.

The five member committee approved all but one of the recommended credits in a single motion without discussion. One application, that of #13 AI California, LLC (Aldi Grocery), was the subject of some debate.

Sara Flocks of the California Labor Federation offered public comment objecting to the tax credit allocation for Aldi on the basis that the jobs they were proposing to create were not “good jobs,” and that there is outstanding litigation against the company. She pointed out that the complementary NEC program specifically excludes all retail businesses from eligibility. GO-Biz countered that the amount and type of litigation against Aldi was not uncharacteristic for similar businesses, and that the distribution center and retail jobs were sorely needed in the areas of their proposed development. One board member, Greg Cogner, actively sided with Flocks’ comments. Three board members asked for additional time to review the issues surrounding the award. Since the credit must be allocated by the end of the fiscal year, another committee meeting was scheduled for June 30 for the committee to make its determination. If the board votes against Aldi, their $700,000 allocation will be added to the amount available for 2014/15.

California Competes Credit Awardee May Withdraw

The Modesto Bee has a somewhat critical article about the recent California Competes announcement of credit awardees. The Bee seems to take issue with the fact that some past activity can be considered toward the business investments on which the credits are based. In addition, they interviewed two of the awardees and found that Duarte Nursery is considering withdrawing their application rather than be held to the conditions of the contract:

Big tax credits are being proposed for Modesto’s Flowers Baking Co. and Hughson’s Duarte Nursery. State officials say the corporate tax breaks would be in trade for those companies creating full-time jobs by expanding.

A government committee next week will consider approving $300,000 for Flowers to supposedly create 121 jobs and $250,000 for Duarte to create 33 jobs.

Unfortunately, most of those jobs won’t actually be new, and some of them may not materialize.

That’s because Flowers already has completed most of its expansion and hiring, and Duarte’s owners are considering withdrawing from the tax credit program because its requirements are too inflexible.

California Competes is a new business incentive program, and its rules are a bit confusing.
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California Competes Credit Awardees Selected

On June 9, GO-Biz announced the tentative winners of the first ever California Competes Tax Credits. The finalization of the awards is dependent on the decision of the “California Competes Tax Credit Committee,” which will hold its first meeting in Sacramento on June 19.

All but $62,000 of the initial $30 million in credit available is being allocated to 20 businesses in the large business category and 11 businesses in the small business category.

The San Diego Union-Tribune has an extensive article on the rewards.

Clarifications From GO-Biz Regarding California Competes Tax Credit

The Sacramento Bee reported on the email distributed by GO-Biz describing the applications received in the first ever application round for the new California Competes Credit. Within that article, the Bee referred to my original post on the subject:

There are 149 applicants that qualified for the second round of the California Competes selection process, representing about $155 million in requested credits.

Go Biz said 10 percent of the applications seek retention credits. That is much less than the figure – 60 percent – reported by the EZ Policy Blog, which follows the program.

The California Competes Tax Credit Committee will consider companies’ requests for tax credits on June 19. Officials will consider the types of jobs created, potential future growth and other criteria.

I had originally written:

Applications for so-called “retention” projects represent over 60% of the applications accepted into the second round. Applications totaling $155,097,747 in tax credits were accepted into the second round. At most, $30,000,000 will be awarded, which is just 19% of the second round of the application process and just 5% of the initial applications.

However, based on the information provided by GO-Biz, my initial conclusion was correct. GO-Biz was kind enough to respond to my queries for clarification, and the result is the following more accurate picture of the application pool:

The 10% referred to in the SacBee article was referring to the percentage of the number initial applications, not the tax credit value requested. Therefore, about 38 of the initial 396 applications were for businesses claiming a retention issue. GO-Biz now says that 149 applications asking for $149 million (as opposed to $155 million stated in their original email) were moved into Phase II. Of that total, $60 million were from businesses selected based on their credit to investment ratios. This is the 200% of tax credit available referred to in the regulations. In addition to that, another $69 million in applications were moved into Phase II based on the retention issue. Therefore 46% (69,000,000 / 149,000,000) of the tax credit value accepted into Phase II was for retention projects, even though those projects only made up 10% of the initial applications. And GO-Biz has confirmed this 46% number.

According to GO-Biz, the remaining $20 million in applications were for additional small businesses since the initial $60 million was apparently over-represented by larger businesses.

The CCC regulations say:

Each applicant shall be listed according to the lowest percentage of the cost-benefit ratio, with the lowest percentage being positioned the highest and so forth. Based an this order, GO-Biz shall then work down the list and engage the most competitive applicants to move forward to Phase II, specifically including a pooled review of the most competitive applicants whose aggregate California competes credit requested is at least two hundred percent of the tax credit available for the application period.

By stating “at least two hundred percent,” GO-Biz have provided themselves with tremendous flexibility to accept applications into Phase II, which they have apparently exercised in this first round.

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