Multistate Tax Update -- April 9, 2015
Massachusetts: Corporate tax amnesty program underway
The Massachusetts Department of Revenue’s (MADOR) 60-day tax amnesty program began March 16, 2015. It applies to a variety of taxes levied on or before Jan. 1, 2015, and it includes different types of taxes than the ones included in the most recent amnesty program, such as corporate excise taxes, including financial institutions, insurance, public utilities, and banks, estate taxes, fiduciary income taxes, and individual use taxes on motor vehicles. This program runs through May 15, 2015.
Approximately 24,000 qualifying taxpayers received a Tax Amnesty Notice from the MADOR. The notices include individual period balances, the amount of unpaid penalty to be waived if the amnesty balance is paid in full by the due date, and the amnesty amount due.
Under the program, the MADOR will waive assessed but unpaid penalties for taxpayers who remit full payment of all outstanding taxes and interest for any period listed on the notice by the May 15 deadline.
The MADOR launched a website to assist taxpayers.
Just before this amnesty program started, Masslive.com reported that Massachusetts Gov. Charlie Baker would offer another one next year with the hope to raise an additional $100 million. The 2016 program would run for all of fiscal year 2016, which begins on July 1, 2015, and waive penalties for individuals and businesses who owe back taxes to the state because they have not filed a return. Brendan Moss, a spokesman for the Secretary of Administration and Finance, said the goal is to get people into the system who have never filed taxes. He estimated that 10,000 to 20,000 people would file their taxes under the program. An additional benefit is that the program will result in new tax revenue in future years. The last time the state ran a tax amnesty program like this proposed one, for non-filers, was in 2002, and it brought in $176 million during a two-month period.
Masslive.com also pointed out that Massachusetts has a history of using amnesty programs aimed at various groups to bring in otherwise lost revenue. For example, in February 2015, the amnesty program targeted corporate tax filers. (The state is still tallying the revenue generated from that program.)
The September-October 2014 amnesty raised $69.1 million and targeted people who owed personal income taxes and non-corporate business taxes like the meals and rooms tax.
The 2010 amnesty covered sales, rooms and meals, and other non-personal, non-corporate taxes, and raised $32.6 million.
The 2009 program focused on those who owed personal income and use taxes, and raised $32.2 million.
Last month, we addressed the effectiveness of tax amnesty programs, and noted that Massachusetts ranked #10 in tax collections per capita in 2013.
States reconsider tax incentives designed to lure businesses
Many lawmakers believe that offering generous tax incentives to businesses is good policy that spurs economic growth. However, some states’ experiments with such incentives have failed, as seen in Kansas. There, as we recently explained, the legislature is now tasked with finding hundreds of millions of dollars to balance the state budget that faces a $280 million shortfall this fiscal year. In addition, the anticipated boost for the economy, in general and small businesses in particular, has not materialized, and it may take years to realize the benefits of the tax cuts. Ohio is another state whose anticipated benefits may not materialize for the economy, according to the Tax Foundation.
It is not surprising that Bloomberg Business reported last week other states are rethinking tax incentives meant to lure jobs and investment as they confront budget shortfalls and question the effectiveness of the incentives. For example, Michigan had to fill a $300 million budget hole this year, Louisiana faces a $1.6 billion deficit, and Oklahoma anticipates a $611 million shortfall next fiscal year.
The article quoted Jeff Chapman, director of economic development at the Pew Charitable Trusts in Washington, who acknowledged that there is still a sense that incentives are necessary to remain competitive. But “[j]ust because you have to have incentives doesn’t mean you have to have all the incentives and pay whatever cost you’re currently paying.”
In Louisiana, Gov. Bobby Jindal proposed reducing corporate subsidies by $526 million to help balance the budget. This could affect a tax credit for filming movies, and suspend tax exemptions for hydraulic fracturing (fracking) for two years, which would cost approximately $289.4 million.
As for Oklahoma, Bloomberg Business quoted Rep. David Dank, the chairman of the subcommittee on Revenue and Taxation, who said that “[i]t’s time to draw a line in the sand and say, ‘[n]o more.’” The subcommittee will not consider new credits or exemptions. Gov. Mary Fallin acknowledges the need to be competitive as a state, but expects to be looking more carefully at whether incentives actually create jobs or spur investments.
In Illinois, Gov. Bruce Rauner recognizes the trade-off, but wants to limit corporate welfare by capping tax credits that he says “awarded millions of dollars in breaks for job retention to companies that have dismissed workers.” Two months ago, the Chicago Tribune revealed that Gov. Rauner had hired a new chief financial officer, Donna Arduin, promising her $120,000 for a four month contract to “address the stew of challenges facing Illinois: a history of overspending, massive pension debt, a steep drop in tax revenues, and a vast political divide between the governor and legislature.”
Ms. Arduin favors reliance on consumption taxes over income and property taxes because, she believes, the latter stunts growth. A separate Bloomberg Business article reports that she recommended Kansas’ state income tax rollback, and that Gov. Brownback has recently proposed increases in consumption taxes to close the budget hole.
Despite all this, lawmakers continue to pursue deals. Bloomberg Business noted that states and localities approve about $50 billion in tax breaks a year, and the number of deals with incentives greater than $100 million has doubled since the recession. These are promoted as a way to spur expansion, attract jobs, and retain companies. Last year, Nevada offered $1.3 billion to lure a Tesla Motors Inc. battery manufacturing plant. And the state of Washington gave Boeing Co. tax breaks worth $3.2 billion in 2003. In 2013, it offered another $8.7 billion to keep work on the 777X jetliner in Seattle.
Officials who were desperate for jobs during the recession are paying more attention to the cost and whether the programs deliver what they promise.
Some states continue to offer film production tax incentives, others seek to end them
About a year ago, the National Conference of State Legislators (NCSL) wrote a piece that discussed states’ usage of film and television production tax credits, which is a relatively new phenomenon. Between 2000 and 2014, the number of states offering some sort of incentive grew from a mere handful to 39 states and Puerto Rico.
There is debate as to whether the programs are worthwhile, and several states have decided to abandon usage of such credits. Arizona, Idaho, Indiana, Iowa, Kansas, Missouri, and Wisconsin have ended their incentive programs or have not included funding for the programs in upcoming budgets. Likewise, Connecticut suspended its incentives for film production, but maintains tax credits for other types of media.
In addition, last month, the Michigan House passed HB 4122, which amends the film and digital media production assistance program to eliminate new and increased funding expenditures related to production, crew, and other personnel, beginning Oct. 1, 2015. However, other facets of the program survive, and the Michigan Film Office maintains a series of Fast Facts about it, including the following:
- Projects must have a minimum spend of at least $100,000 in Michigan to be eligible;
- The incentive rate is 25 percent of direct production expenditures and qualified personnel expenditures;
- An extra three percent is available for expenditures at a qualified facility or post-production facility or 10 percent for expenditures at qualified post-production facility; and
- Incentives for above-the-line ATL personnel are capped at 30 percent of total incentive.
Addressing Michigan’s effort, the Tax Foundation noted its own criticism of film tax programs in general, for these reasons:
- Jobs created from production are often temporary and may no longer be available once the company leaves the state to move on to another project;
- It is highly unlikely that these programs will create a permanent film industry within a state if there wasn't one already;
- These programs don’t pay for themselves by generating new tax revenue from increased economic activity (most studies have found they lose money); and
- The estimates of the economic activity generated by film production should be taken with a grain of salt because “…the fact that film productions impact the broader economy is not unique to this industry."
Whether Michigan actually does end the film production tax incentives remains to be seen. MLive.com revealed that Senate Majority Leader Arlan Meekhof (R-West Olive) views the house bill as a major shift in policy, a confrontation that makes things “very difficult” in light of the promises that have been made and the fact that the program has not fully matured.
On the other hand, the California Board of Equalization recently announced the establishment of a New Film and TV Tax Credit Program (Program) for taxable years beginning on or after Jan. 1, 2016. It permits a tax credit to be used to offset income and/or sales and use tax liabilities based on qualified expenditures for film and television shows produced in California.
Administered by the California Film Commission, the Program offers 20 or 25 percent tax credits, and implements meaningful changes. Among other things, it:
- Increases tax credit program funding from $100 million to $330 million per fiscal year; extended for five years;
- Expands eligibility to big-budget feature films, one hour television series (for any distribution outlet) and television pilots;
- Eliminates budget caps for studio and independent films; and
- Replaces current lottery with a ranking system based on jobs and other criteria.
It is easy to see why California is so heavily invested in these kinds of tax credits. What is surprising is the list of others doing the same.
Kentucky is a state which is expanding its film incentive program. Gov. Beshear signed HB340 on March 30, 2015. The bill establishes or lowers thresholds for companies to qualify for film tax credit incentives, and increases current incentives for a motion picture or entertainment production filmed or produced in a Kentucky county, whether designated an enhanced incentive county or not.
Georgia, another state that provides film tax credits, offers production incentives of up to 30 percent of a qualified project’s production expenditures in transferable tax credits. Other tax benefits include the following:
- 20 percent base transferable tax credit;
- 10 percent Georgia Entertainment Promotion uplift, which can be earned by including an embedded Georgia logo on approved projects and a link to TourGeorgiaFilm.com on the promotional website;
- $500,000 minimum spend to qualify; and
- No limits or caps on Georgia spend, no sunset clause.
The Georgia Department of Revenue (GDOR) recently released a 2014 ruling interpreting the rules pertaining to the transferability of tax credits. In that ruling, the GDOR determined that a taxpayer is permitted to rescind the sale of tax credits to one buyer and sell them to a different purchaser provided the terms and details of the transaction conform to the provisions in the law.
Nevada also offers the following transferrable tax credits, as of Jan. 1, 2014, for productions that shoot at least 60 percent in-state and spend a minimum of $500,000:
- 15 percent of the cumulative qualified production costs;
- 12 percent on wages, salaries, and fringe benefits to non-resident above-the-line personnel; and
- 12 percent on wages, salaries, and fringe benefits for non-resident below-the-line personnel through Dec. 31, 2015 (reduced to 10 percent in 2016, and eight percent in 2017).
Other incentives include two percent bonuses under certain circumstances, and a four-year carry over period. The project cap is $6 million per production, and there are other applicable caps as well.
Finally, the Hawaii Film Office touts the Aloha State as “Hollywood’s Tropical Backlot,” where productions like Top Chef, Wheel of Fortune, and over 700 individual television episodes of shows like The Lucille Ball Show, I Dream of Jeannie, Beverly Hills 90210, The Brady Bunch, Charlie’s Angels, Murder She Wrote, China Beach, Eight is Enough, The Rockford Files, ER, and Las Vegas were filmed. Of the hundreds of feature films that Hawaii hosted, their theatrical runs have produced more than $4 billion in gross revenues, 15 Academy Award nominations, and nine Oscars.
As of 2013, when Hawaii expanded its production tax credit, the state offers a 20-25 percent motion picture, digital media, and film production income tax credit. It is refundable, and is based on a production company’s expenditures in Hawaii while producing a qualified film, television, commercial, or digital media project. The 20 percent credit applies to qualified production costs incurred on Oahu, and the 25 percent credit applies to costs incurred on the neighbor islands (Big Island, Kauai, Lanai, Maui, and Molokai).
Film Production Capital provides a five-star rating guide for all 50 states to determine which jurisdictions offer the best incentives.
For additional information regarding these subjects, or any other multistate tax issues, please contact:
David M. Kall
David H. Godenswager, II
Susan Millradt McGlone
Multistate Tax Services
Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.