State & Local Tax Alert

Transcription

1 State & Local Tax Alert Breaking state and local tax developments from Grant Thornton LLP Incentive Reform: The Texas Enterprise Zone Program Effective September 1, 2015, several significant amendments have been made to the Texas Enterprise Zone (EZ) Program. 1 These amendments affect eligibility requirements, the application process, and the potential benefit of the EZ Program to qualifying businesses. Overview The EZ Program provides an incentive to companies investing in qualifying capital and hiring qualified employees over a five-year designation period. 2 Qualifying companies may be eligible for refunds of state sales and use taxes ranging from $2,500 $7,500 per employee, depending upon the size and scope of the qualifying project. Application Process Qualifying companies must submit an application to the state and be nominated by a local unit of government. 3 As part of the application process, candidates must obtain local nomination to the EZ Program in order to have a valid application. The nominating local jurisdiction may either be the city or county in which the qualified business has activity. Local jurisdictions have a limited number of applications they can nominate per biennium. Historically, both counties and municipalities have been able to nominate projects at will and independently without notifying other counties and municipalities of their nominations. However, a county may only nominate three or less projects located in a city. 4 Hiring Commitment The EZ Program was specifically designed to encourage capital investment and hiring of employees who are economically disadvantaged or residents of EZs. 5 Areas designated as EZs generally are economically distressed areas determined by poverty level, or certain federally designated development zones. 6 Because it is common for business locations outside an EZ to hire employees residing in a nearby EZ, the EZ Program is open to Release date September 14, 2015 States Texas Issue/Topic Texas Enterprise Zone Contact details Brian Murphy T E brian.murphy@us.gt.com Mike Eickhoff T E mike.eickhoff@us.gt.com Tim Schram T E tim.schram@us.gt.com Steve Carter Philadelphia T E steve.carter@us.gt.com Tam Vo Houston T E tam.vo@us.gt.com Marvin Bayan T E marvin.bayan@us.gt.com 1 S.B. 100, Laws TEX. GOV T. CODE et seq. 3 TEX. GOV T. CODE TEX. GOV T. CODE (b). 5 TEX. GOV T. CODE TEX. GOV T. CODE

2 Grant Thornton LLP - 2 eligible businesses anywhere in Texas regardless of whether the business facility is located within an EZ. However, being located within or outside of an EZ determines the applicant s hiring commitment during the designation period. To be considered a qualified business, projects within an EZ must meet a hiring commitment of at least 25 percent of new or replacement employees who are economically disadvantaged or reside in an EZ. 7 Projects outside of an EZ must commit to a 35 percent hiring commitment. 8 Qualifying Capital Investments, Employees and Jobs Qualifying capital investment is defined as purchases of capital or fixed assets to be used in the regular course of business at the applying qualified business site. These assets include but are not limited to land, buildings, labor used to construct or renovate a capital asset, furniture, manufacturing machinery, computers and software, or other machinery and equipment. 9 Qualified employees include people who work for a qualified business, receive wages from that business from which employment taxes are deducted, and perform at least 50 percent of the service for the business at the qualified business site (unless the person s job responsibility is to transport or deliver the goods or services of the enterprise project). 10 Qualifying new permanent and retained jobs eligible for benefit are those that provide at least 1,820 hours of employment per year and are maintained for the longer of: (a) three years after (i) the date on which a state benefit is received (for a new permanent job) or (ii) the expiration date of the claim period for receipt of a state benefit (for a retained job); or (b) the duration of the project s designation period. 11 Benefits Historically under the EZ Program, the benefit for a designated enterprise project is a refund of the state sales and use tax on qualifying taxable purchases. 12 The amount of the potential sales and use tax refund is dependent on the amount of capital investment and jobs created or retained. For projects investing between $5 million and $150 million of qualified expenditures, the potential refund of state sales tax is $2,500 per employee, over the five-year designation period, with a maximum of $1,250,000 over the full length of the project for the creation or retention of 500 jobs. 13 For projects investing between $150 million and $250 million of qualified expenditures, those companies may apply for double jumbo project designations, doubling the maximum refund available to $5,000 per qualified employee, 7 TEX. GOV T. CODE (a)(1). 8 TEX. GOV T. CODE (a)(2) TEX. ADMIN. CODE 176.1(b)(6). 10 TEX. GOV T. CODE (7). 11 TEX. GOV T. CODE TEX. GOV T. CODE TEX. GOV T. CODE (b)(4). Lesser amounts are available for smaller-scale projects. TEX. GOV T. CODE (b)(1)-(3).

3 Grant Thornton LLP - 3 with a full project maximum of $2,500,000 for the creation or retention of 500 jobs. 14 For investments over $250 million, those companies may apply for triple jumbo project designations, tripling the maximum refund available to $7,500 per qualified employee, with a full project maximum of $3,750,000 for the creation or retention of at least 500 jobs. 15 Also, companies may apply for concurrent designations, which would also provide multiple benefits. 16 Further, the EZ Program also provided a designated enterprise project with credits toward the company s Texas franchise tax bill. 17 Changes Made by S.B. 100 Application Process S.B. 100 amends the EZ Program to require an interlocal agreement between the county and municipality affirming which governing body has the administrative authority for nomination. An interlocal agreement is required only when a county provides the nomination and both the county and municipality must approve of the nomination. 18 However, counties would no longer be limited to nominating only three projects located within a municipality. 19 Qualifying Employees S.B. 100 changes the definition of qualified employee slightly, so that people that engage in the transportation of goods and services who report to the qualified business site and reside within 50 miles of the qualified business site, do not have to meet the 50 percent qualified business site presence test. 20 The legislation also expands the definition to include veterans as qualifying employees to meet the hiring requirements. 21 The definition of veteran requires that the individual has served in the U.S. military, the state military, or an auxiliary service of the U.S. or state military, and has been honorably discharged. 22 Hiring Commitment S.B. 100 changes the 25 percent and 35 percent hiring commitment rules by requiring that the qualified business have 25 percent or 35 percent of its new permanent jobs (instead of its employees) in the EZ held by those who are economically disadvantaged, reside in an EZ, or are veterans TEX. GOV T. CODE (b)(5). 15 TEX. GOV T. CODE (b)(6). 16 TEX. GOV T. CODE (e). 17 TEX. GOV T. CODE (a)(2). 18 TEX. GOV T. CODE (c). 19 TEX. GOV T. CODE (b). 20 TEX. GOV T. CODE (7)(C). 21 TEX. GOV T. CODE (a)(1)(C), (a)(2)(c). 22 TEX. GOV T. CODE (9)(A). 23 TEX. GOV T. CODE (a)(1), (2).

4 Grant Thornton LLP - 4 Benefits S.B. 100 revises the EZ Program so that double jumbo and triple jumbo designations are only available for projects with 500 new permanent jobs (rather than new permanent and retained jobs). 24 The following chart outlines the revised qualifications and benefit. 25 Capital Investment Employment Maximum Refund Per Qualifying Job $5,000,000 to $149,999,999 Up to 500 jobs New or retained $150,000,000 to $249,999,999 Double Jumbo Project $250,000,000 or more Triple Jumbo Project 500 jobs New only 500 jobs New only Maximum Potential Refund $2,500 $1,250,000 $5,000 $2,500,000 $7,500 $3,750,000 The legislation also allows for half designations, in which case a maximum benefit of $1,250 per employee payable as $125,000 per year for a maximum for $750,000 of potential. 26 S.B. 100 also eliminates concurrent designations, limiting companies to only one enterprise project designation per site during the five-year designation period. 27 Further, S.B. 100 removes the option to take a franchise tax credit in addition to the sales tax refund. 28 Commentary Historically, the EZ Program has predominantly been skewed toward job retention projects, in which the EZ Program benefits are claimed only for existing jobs. Since September 2010, the percentage of designated projects without new jobs has increased to 61.7 percent of all approved projects. The intent of these revisions to the EZ Program is to bring a larger focus to job creation, not just job retention. The creation of half designations would help benefit small businesses by increasing access and participation in the EZ Program. However, S.B. 100 does not include provisions that would proportionately reduce the employment or investment eligibility requirements for half designations. The impact of the deletion of the option to take a franchise tax credit may not be significant, since the sales tax refund is the more significant benefit and the major reason companies apply to the EZ Program. The information contained herein is general in nature and based on authorities that are subject to change. It is not intended and should not be construed as legal, accounting or tax advice or opinion provided by Grant Thornton LLP to the reader. This material may not be applicable to or suitable for specific 24 TEX. GOV T. CODE (b)(5), (6). 25 TEX. GOV T. CODE TEX. GOV T. CODE (d-1); (e); (a)(2). 27 TEX. GOV T. CODE (e). 28 TEX. GOV T. CODE

5 Grant Thornton LLP - 5 circumstances or needs and may require consideration of nontax and other tax factors. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Grant Thornton LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, re-keying or using any information storage and retrieval system without written permission from Grant Thornton LLP. This document supports the marketing of professional services by Grant Thornton LLP. It is not written tax advice directed at the particular facts and circumstances of any person. Persons interested in the subject of this document should contact Grant Thornton or their tax advisor to discuss the potential application of this subject matter to their particular facts and circumstances. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed.