The Center of the California Enterprise Zone Information Universe

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.

What Is Going On With Enterprise Zone Voucher Submission Deadlines?

As we approach June, one Enterprise Zone (Delano) has already stopped accepting voucher applications, and two major zones (San Francisco and San Jose) plan to stop by June 30th. Last year, AB 106 extended the deadline for taxpayers to apply for hiring credit vouchers until the end of 2014. However, that bill also set the deadline for a zone to process and issue decisions for those applications on the same day, thus setting up a situation in which each zone has to figure out its own deadline for submissions in order to be able to complete their processes by December 31st.

HCD has published a list of anticipated closure dates on its website.

FTB has made it clear that their policy is that a taxpayer must have a voucher issued by a zone in order to claim a tax credit, even if they posses all of the necessary documentary proof that the employee qualifies.

On May 7, HCD published Management Memo 14-02 outlining a new policy by which zones can appoint another zone as a third-party to take on their vouchering. This might occur either where a zone has more volume they can process in the time allowed, or if a zone needs to cease operating before the end of the year for other reasons. The memo explains:

In its enabling legislation, the state legislature extended the application deadline for hires made on or before December 31, 2013, so that all taxpayers would have an ample opportunity to apply for and receive vouchers. It is therefore necessary that all taxpayers are allowed the same length of time to exercise this opportunity whether or not their particular zone has decided to continue support of this activity.

Then, on May 28, HCD distributed an application to zones interested in acting as third-party voucher agencies. They have set a deadline of June 6 for those applications and will presumably begin the process of shifting vouchering activity from the closing zones to those zones who respond to the program. However, even with the implementation of this plan, there will inevitably be some, as of yet unknown, deadline for submitting vouchers in order for them to be processed by December 31.

Assemblyman Daly has introduced AB 2517 to remove the uncertainty created by AB 106 and provide the equal opportunity to taxpayers to apply for those vouchers. The bill would maintain the 12/31/2014 deadline for submitting vouchers, but would give the zones the ability to complete their review process for another year. The bill passed the Assembly on May 19th 75-0 and now goes to the Senate Governance and Finance Committee.

Film Tax Credit Expansion Passes Assembly

From the Hollywood Reporter:

Legislation to expand and extend incentives to keep film and television production in California passed a major milestone.

As expected, the California Film and Television Job Retention and Promotion Act of 2014 was approved by the state assembly Wednesday by a unanimous vote of 71-0.

The legislation, authored by Assemblymen Mike Gatto (D-Los Angeles) and Raul Bocanegra (D-Pacoima) had more than 60 co-authors.

However, there is still no specific amount of money the state will put up for the new legislation, which would replace the current program that allocates $100 million a year, which has not proven to be enough to stem the flow of production to other states and countries that offer even greater incentives.

A source in Sacramento said that the amount will be determined in coming weeks after the budget priorities become clearer. Advocates are hoping to see the amount authorized increased by two to four times, but that may be too ambitious. There was a legislative analyst report that said the program doesn’t return as much in tax dollars as backers claim, but Gatto has said that did not consider the local tax revenue or the jobs that are created.

“We can’t sit by and watch a $17 billion dollar a year sector of our economy leave California,” said Bocanegra. “This expanded and improved program will go a long way toward making California more competitive with other states’ programs.”

Between 2004 and 2012, California lost more than 16,000 film- and television-industry jobs, according to the U.S. Department of Labor, resulting in more than $1.5 billion in lost wages and economic activity.

GO-Biz Received Applications for $559 Million for $30 Million California Competes Round

In an email to interested parties, the Governor’s Office of Business Development revealed some of the results of the recent California Competes application round:

Thank you for your interest in the California Competes Tax Credit (CCTC) program. On March 19, 2014, we launched this new tax credit as a component of Governor Brown’s Economic Development Initiative. For fiscal year 2013-14, we were authorized to award $30 million in tax credits of which 25% ($7.5 million) was reserved for small businesses. As of the April 14th application deadline, we received 396 applications with a combined tax credit request of over half a billion dollars.

The highest ratio of tax credit to investment that was accepted into the second round was 1.84% (9.25% for small businesses).

The first evaluation phase of the CCTC is an automated quantitative process that looks at the ratio of the applicant’s tax credit request divided by the sum of the applicant’s proposed “aggregate new employee compensation package” and “aggregate investment package.” The ratios were ordered from lowest to highest and applicants with a ratio within 200% of the total tax credit available (200% x $30 million = $60 million) were moved into evaluation Phase II along with all applications that applied as a “retention” project, certifying that they are at-risk of reducing the number of their employees in California or relocating jobs out of California absent consideration for the CCTC.

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.

GO-Biz will announce its recommended awardees on June 9th.

Senator Wyden’s Floor Speech On Tax Extenders

The “EXPIRE Act,” which passed the Senate Finance Committee under its new Chairman Ron Wyden (D-OR) last month was brought to the Senate floor today. The Senate invoked cloture by a vote of 96-3 on Tues. morning and now enters the process of debate and possible amendments.

Here is the video of Senator Wyden’s floor speech in which he discusses WOTC explicitly:

Governor Brown Designates Three Pilot Areas for New Employment Credit

From the Governor’s website:

SACRAMENTO – Building on efforts to grow California’s economy and help businesses create jobs, Governor Edmund G. Brown Jr. today announced new tax incentives for employers hiring workers in Fresno, Merced and Riverside.

“The state’s economy is steadily improving and more than a million Californians are back to work after the massive mortgage meltdown,” said Governor Brown. “These tax credits will spur new jobs and help communities hardest hit by the recession.”

The New Employment Credit (NEC) is a hiring credit for businesses in California communities with the highest rates of unemployment and poverty. The credit is part of the Governor’s Economic Development Initiative – AB 93 and SB 90 – which passed in 2013 and received support from both Republicans and Democrats in the Legislature, businesses and labor groups.

Under the legislation, the Governor’s Office of Business and Economic Development (GO-Biz) will oversee the credit and may designate up to 5 pilot areas. In selecting the first round of pilot areas, GO-Biz evaluated employment, poverty and wage data to identify areas of the state that would benefit the most from the expanded hiring credit. The geographical designations for the NEC and the pilot areas can be found on the Franchise Tax Board’s website. The designation as a pilot area is effective immediately, applicable for four years and may be extended by GO-Biz for an additional three years.

The Governor’s Economic Development Initiative is funded by redirecting approximately $750 million annually from the state’s outdated and ineffective Enterprise Zone program and also includes a statewide sales tax exemption on qualifying manufacturing equipment and research and development equipment purchases for biotech and manufacturing companies.

The Governor’s Economic Development Initiative builds on the Governor’s strong record of pursuing regulatory changes and legislation to improve the state’s business climate. Since taking office in 2011, the Governor has approved legislation to modernize the workers’ compensation system, the regulatory and fee structure for the timber industry, Americans with Disabilities Act (ADA) compliance requirements and the facility inspection process for the life sciences industry. In addition to these legislative actions, Brown has established GO-Biz as the state’s lead economic development office to advance business opportunity in California and signed international agreements with China, Peru and Israel to help boost California’s trade interests around the world.

Since Governor Brown took office, California’s unemployment rate has dropped from 12.1% to 8.1% and the state has added more than one million jobs. Last September, Governor Brown signed legislation to raise California’s minimum wage from $8.00 per hour to $10.00 per hour.

Additional information on the NEC and other aspects of the Governor Economic Development Initiative can be found here.

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