Press Room: Tax Release
California Shakes Up Tax Incentives
Assembly Bill 93 passed the California legislature last week eliminating the California Enterprise Zone (EZ) program and enacting new incentives.
Under Assembly Bill 93, the EZ program will sunset on December 31, 2013. Employees hired in an EZ location up to that day may be qualified. An employer may take the credit over a qualified employee’s five year period of employment including the employment period after December 31, 2013. In addition, the EZ sales tax credit will apply to qualified assets placed in service up to December 31, 2013. A taxpayer that is unable to offset tax with these credits may carry over the credits to 10 succeeding taxable years.
The bill redirects approximately $750 million from the Enterprise Zone system to the following new tax incentives.
Job Creation Credit
A new credit is available to businesses in certain designated census tracts or former EZs that hire qualified employees on or after January 1, 2014 and before January 1, 2021 resulting in a new increase in jobs. This new credit is significantly more restrictive than the sunsetting EZ program. While the former program did not restrict the type of taxpayer who may claim a credit, a qualified taxpayer under the new law does not include retailers, restaurants, bars or casinos. The credit also applies only to four categories of qualified employees: veterans who are unemployed when discharged, individuals who have been unemployed for six months or more, individuals that qualify for the federal Earned Income Tax Credit and ex-offenders. Further, a qualified employee must be paid between one-and-a-half to three-and-a-half times the current minimum wage. To qualify for these credits, employers must obtain a credit reservation from the Franchise Tax Board within 30 days of the commencement of employment for each qualified employee.
California Competes Incentive Credit
Assembly Bill 93 enacts a competitive income tax credit for each taxable year beginning on or after January 1, 2014 and before January 1, 2025, administered by GO-Biz, the Governor’s Office of Business and Economic Development. The credit is competitive and requires a negotiated written agreement based upon the number of jobs to be created or retained, the extent of poverty in an area, limitations on minimum compensation, the anticipated period of job retention and expected capital investment. While there are no set limits or requirements for the number of jobs or capital investment in the statute, GO-Biz may issue further guidance under its authority to prescribe rules and regulations in order to carry out the law. All awards will be fully transparent, made publicly available with information posted on the GO-Biz website. If a business fails to fulfill the contract, that business may be required to refund any funds received.
Sales and Use Tax Exemption
Assembly Bill 93 enacts a sales and use tax exemption for the first $200 million of equipment placed in service each year on or after July 1, 2014 and before January 1, 2019, that is primarily used in manufacturing, processing, refining, fabricating or recycling tangible personal property, as well as property used in research and development activities. To qualify for the exemption the qualified person must be primarily engaged in those lines of business described in Codes 3111 to 3399, inclusive, 541711, or 541712 of the North American Industry Classification System (NAICS) published by the United States Office of Management and Budget (OMB). This includes among others manufacturers in aerospace, textiles, pharmaceuticals, printing, and food, biotechnology companies, and business engaged in research and development in agriculture, electronics, environmental biology, botany, computers, chemistry, food, fisheries, forestry, geology, health, mathematics, medicine, oceanography, pharmacy, physics, veterinary and other allied fields. All members of a combined franchise tax report are considered a single qualified person for purposes of the $200 million limitation.
To take the exemption each qualified person must supply the vendor with an exemption certificate. If within one year of purchase the property is removed from the state or is converted to a non-exempt use, or if the purchase exceeds the $200 million annual limit, the company must remit the sales tax plus interest.
The shift in incentives creates a new landscape for California taxpayers. Now is a good time to evaluate employment and capital investment in California. For California EZ businesses, Assembly Bill 93 does not provide any restriction for certifying qualified employees. Now is a good time to review all employees to maximize the amount of the credit available. Qualified employees hired in 2013 may generate credit for five years into 2018. Including the carryover, EZ employers may be able to offset franchise tax with EZ credits up to 2028.
For sales and use tax purposes, EZ companies may consider placing qualified assets in service prior to December 31, 2013. Companies that may be in industries or conducting activities that may qualify for the new sales and use tax exemptions may consider placing assets in service after the exemption is effective, or consider planning options for assets that may be placed in service sooner. In addition, companies may plan for the exemption to identify typical assets that may qualify and develop a process for claiming the exemption under the specific requirements in the law.