“New Texas Enterprise Zone Rules Open Lifeline to Smaller Prospective Businesses” by Weaver

Tax Management

Weekly State Tax Report™ NUMBER 31

JULY 31, 2015

HIGHLIGHTS

Texas Margin Tax Not ‘Income Tax,’ Appeals Court Says Multistate businesses can’t choose whether to use the income apportionment formula under the Multistate Tax Compact or the Texas margin tax, because the margin tax isn’t an income tax in the first place, a Texas appellate court ruled in a win for the state. The Texas Court of Appeals for the Third Judicial District rejected arguments from Graphic Packaging Corp., a Georgia-based packaging company, that because the margin tax isn’t a gross receipts tax it must be an income tax.

Multistate Tax Commission Group OKs Nexus Model Statute A committee of the Multistate Tax Commission (MTC) has approved a model statute attempting to define when outof-state sellers have an obligation to pay or collect sales and use taxes. The MTC Uniformity Committee voted 12-0 to forward the Model Sales and Use Tax Statute to the commission’s Executive Committee, which will convene during the MTC’s 48th annual meeting in Spokane, Wash.

New Texas Enterprise Zone Rules Include Smaller Businesses Effective Sept. 1, changes to the Texas Enterprise Zone Program will ultimately result in greater credit availability to new and smaller companies looking to participate in the state’s tax incentives program designed to induce private investment in severely distressed areas of the state, a Dallas tax attorney told Bloomberg BNA. Mike Goral, partnerin-charge of state and local tax (SALT) services at Weaver’s Dallas office, said the ‘‘benefits’’ of the new amendments would include ‘‘allowing new and smaller companies that begin business in Texas to participate in the Program, since the focus now is on new permanent jobs as opposed to job retention which tended to benefit larger companies that grabbed most of the available credit in the previous enterprise zone Program.’’

Illinois Towns Seek Class Certification in Hotel Tax Dispute Illinois municipalities are taking another swipe at online travel companies, filing an amended motion for class certification in litigation that seeks unpaid hotel occupancy taxes and penalties from e-commerce defendants Expedia Inc., Orbitz LLC, Priceline.com Inc. and Travelocity.com LP. The Village of Bedford Park, Ill., recently filed a second motion for class certification in U.S. District Court for the Northern District of Illinois on behalf of 154 municipalities.

Perspective: Bloomberg BNA Q&A With Executive Director Of the Multistate Tax Commission, Joe Huddleston Joe Huddleston has served as the executive director of the Multistate Tax Commission for the past decade. In this indepth interview with Bloomberg BNA, Huddleston discusses the biggest challenges facing the state and local tax world today, new frontiers for the MTC and his decision to return to the private sector.

Perspective: Does N.Y. Overreach in Its Tax Enforcement? An In-Depth Look at the State’s Policies and Practices New York is a leader in its tax enforcement and compliance efforts; however, many tax attorneys and certified public accountants interviewed by Bloomberg BNA expressed concerns that the state may be overreaching in a number of key areas. This article examines the states policies and practices in key areas such as sales tax audits, residency and domicile issues and criminal enforcement in order to determine whether the state sometimes goes too far.

ISSN 1534-1550

CREDITS & INCENTIVES

(Vol. 2015, No. 31)

Texas

Double, Triple Jumbo Designation Require New Permanent Jobs. Under the changes set to be enacted by the

Enterprise Zone Credits

amendments beginning at the start of September, projects could be designated as Double Jumbo and Triple Jumbo only if they created new permanent jobs.

New Texas Enterprise Zone Rules Open Lifeline to Smaller Prospective Businesses ffective Sept. 1, changes to the Texas Enterprise Zone Program will ultimately result in greater credit availability to new and smaller companies looking to participate in the state’s tax incentives program designed to induce private investment in severely distressed areas of the state, a Dallas tax attorney told Bloomberg BNA.

Mike Goral, partner-in-charge of state and local tax (SALT) services at Weaver’s Dallas office, said the ‘‘benefits’’ of the new amendments would include ‘‘allowing new and smaller companies that begin business in Texas to participate in the Program, since the focus now is on new permanent jobs as opposed to job retention which tended to benefit larger companies that grabbed most of the available credit in the previous enterprise zone Program.’’ ‘‘The new enterprise zone credit has been significantly modified by the Texas legislature,’’ said Goral in a July 27 e-mail. Tex. Gov. Greg Abbott (R) signed the bill—S.B. 100— into law June 16, following a 139-3 May 24 approval in the House and unanimous Senate passage April 14. Set to go into effect Sept. 1, the amendments to the program are an effort, the legislation’s author said, to improve the mix of jobs created by the zone, which currently tilts heavily toward job retention rather than creation. Authored by Vice-Chairman of the Senate Committee on Finance, state Sen. Juan ‘‘Chuy’’ Hinojosa (D), S.B. 100 amounts to a restructuring of the Texas Enterprise Zone program and would amend requirements related to project eligibility for various designations and benefits.

Stressing Job Creation Rather Than Retention. Administered by the Texas Economic Development Bank, approved projects are eligible to apply for state sales and use tax refunds on qualified expenditures, with those amounts tied to capital investment criteria and the number of pledged jobs created at the qualified business site. A major amendment to the enterprise zone rules would see maximum refund levels fall from $3.75 million to $1.25 million for projects designed to retain jobs, according to a bill analysis authored by the House Research Organization (HRO), a nonpartisan independent department of the Texas House. Under the new amendments, a $1.25 million refund would be the ceiling for projects designed to retain jobs. The current mix of program benefits under the program sees 86 percent of the program directed toward retained jobs, with the remaining 14 percent going toward new jobs, according to an excerpt from a June 26 legislative report from Hinojosa’s office authored by legislative director Josh Reyna. TAX MANAGEMENT WEEKLY STATE TAX REPORT

ISSN 1534-1550

As designated by the state development bank, a project can be considered Triple Jumbo if the capital investment is $250 million or greater and it creates more than 500 new jobs. While incentive levels will fall for those projects targeting job retention, Triple Jumbo projects creating new permanent jobs will be eligible for a refund of up to $7,500 per new permanent job, with a maximum refund of $3.75 million. Under the new regulations, a project receiving the ‘‘Double Jumbo’’ designation from the bank will be eligible for a refund of up to $5,000 per new permanent job created, with a refund ceiling of $2.5 million for the creation of 500 new permanent jobs and between $150 million and $249 million in capital investment, according to the legislation. Created in 1988 and modeled after President Ronald Reagan’s federal enterprise zone initiative, the current incarnation of the program ‘‘offers greater incentives to bigger projects [double-jumbo and triple-jumbo] based on higher pledged jobs (created or retained) and greater capital investment,’’ according to Hinojosa’s office. ‘‘However, over the years the program moved away from its mission of creating jobs and turned its focus on subsidizing retained jobs,’’ according to Reyna. The program has accounted for 897 projects with 353,131 jobs (new and retained) and $59.5 billion in capital investment as of August 2013, according to a December 2014 data sheet on the program authored by the Texas Economic Development Bank.

Loss of Franchise Tax in Enterprise Projects. Additionally, approved enterprise projects would no longer be eligible to receive a franchise tax credit, according to the HRO bill analysis. Weaver’s Goral said the loss of the franchise tax credit amounted to a ‘‘disadvantage’’ in terms of assessing the new amendments, but downplayed that significance of that change. ‘‘Texas’ relatively low franchise tax rate and the fact that most companies remit significantly more sales tax than franchise tax is really not in my view a significant loss of benefit for many companies,’’ said Goral. ‘‘In addition, the ability to use the credit for additional sales tax items and expanding the number of items that can be offset by the sales tax makes the sales tax credit even more appealing,’’ he said. Pointing to another benefit, Goral said that even in the event a company does not hire new employees from the enterprise zone where the company is physically located but hires at least 35 percentof new permanent jobs from residents of other enterprise zones, economically disadvantaged individuals or veterans still qualify for the credit. Assessing the broader ramifications of the amendments, Goral said local communities ‘‘will be impacted’’ by the new regulatory landscape, noting that with the elimination of the franchise tax—paid from the state’s coffers—local governments may have to give up some BNA TAX

7-31-15

(Vol. 2015, No. 31)

CREDITS & INCENTIVES

sales tax revenue to offset the credit offered to companies. ‘‘However the benefit of having additional local citizens working is believed by the legislature to more than make up any losses from sales tax revenue,’’ he said. Program Benefits Guidelines for the Texas Enterprise Zone Program are available at http:// comptroller.texas.gov/taxinfo/enterprise_zone/ jc_guidelines.pdf.

BY PAUL STINSON

7-31-15

To contact the reporter on this story: Paul Stinson in Austin, Texas at pstinson@bna.com To contact the editor responsible for this story: Cheryl Saenz at csaenz@bna.com 䡺 For a discussion of Enterprise Zone Credits in Texas, see 1480-2nd T.M., Credits and Incentives: OR Through WY, at 1480.12.A.

TM-WSTR

ISSN 1534-1550