Credits, incentives and business location decisions

By Terry Barrett, CPA

When Amazon announced it was looking for a second headquarters location (HQ2) that would create up to 50,000 high-paying jobs, cities and states pulled out all stops to put together THE package to lure them. What began as bids from 238 cities and regions from across 54 states, provinces, districts and territories across North America is now down to 20 potential cities, including areas in Northern Virginia; Washington, D.C.; Montgomery County, Md.; and Raleigh, N.C., to name a few of the nearby locations. A decision is expected in 2018.

Each city/state proposed certain incentives, tax or otherwise, to attract HQ2. While most, including Virginia, have been quiet about the incentives being offered, it has been reported that Newark and the state of New Jersey are collectively offering tax incentives of up to $7 billion.1 Maryland recently passed legislation called Promoting ext-Raordinary Innovation in Maryland’s Economy (the PRIME Act) and the Maryland Metro/Transit Funding Act. The legislation provides $3 billion in tax credits and exemptions if and when Amazon locates in Maryland and creates the requisite number of jobs and economic activity. Substantial funding is also provided for the D.C. area’s flailing Metro system. Amazon has said the second headquarters would be equal to its Seattle campus, and estimates company investments in Seattle from 2010 through 2016 resulted in an extra $38 billion to the city’s economy. Assuming those estimates are correct, there is no doubt everyone is clambering for the “win.”

While the stakes rarely are not as high as with HQ2, states and localities often compete for business locations, relocations and expansion. New/expanding business generally means jobs, investment in the local economy, investment in the state economy and more tax revenue.

Incentives are viewed as investments by the jurisdictions in future economic growth and involve business decisions by both the jurisdictions and the businesses. The intent obviously is to result in a win-win situation for both businesses seeking to locate or expand and the jurisdictions involved.

Incentives generally fall into two categories: statutory incentives and discretionary incentives. Statutory credits and incentives are established by law. There are no subjective considerations or determinations. Rather, there are express expectations of a company in order to receive the benefit. If a business meets the expectations, such as the establishment of a certain number of new jobs, investments of a certain amount in new manufacturing equipment or the training of employees, and follow the specific criteria and guidelines for obtaining the credit (e.g., completing applications and submitting information by certain due dates), they receive the benefit. Examples of statutory incentives include tax credits, exemptions and reduced tax rates. Virginia and most states offer a wide variety of tax credits. Some of the income tax credits offered in Virginia are the Research and Development credit, the Major Business Facility Job Tax Credit, the Worker Retraining Tax Credit and the Green Job Tax credit.

Other statutory tax incentives may be in the form of sales and use tax exemptions. Some states, including Virginia, offer broad sales and use tax exemptions for manufacturing and a host of other

industries. There may be other types of tax incentives, e.g., reduced property tax rates like one passed by Henrico County in 2017 that reduced the property tax rates on equipment used in data centers by 83 percent. Other localities seeking to attract data centers have also reduced their property tax rates.

Often incentives are not so much based upon what a company does but rather where it does it. States and localities often offer incentives in terms of lowered or waived property taxes, local license taxes or fees, when businesses locate in enterprise or technology zones.

Discretionary incentives may be established by law but they involve a subjective analysis of the economic value and return on investment to the jurisdiction. Often, businesses compete for these discretionary incentives. Examples of discretionary incentives in Virginia are several offered through the Virginia Economic Development Partnership (VEDP). Two of the more popular incentives are the Commonwealth’s Opportunity Fund (formerly known as the Governor's Opportunity Fund) and the Virginia Jobs Investment Program. The Commonwealth’s Opportunity Fund is an incentive the governor may extend to secure business location or expansion in Virginia. With this fund, grants are awarded to localities on a matching basis with the expectation that the grants will result in location or expansion in that locality. The Virginia Jobs Investment Program is an incentive program that offers recruiting and training assistance to businesses creating new jobs or undergoing technological change. The VEDP works with Virginia-based businesses, as well as those from outside the state, that are considering Virginia as a location in determining and obtaining the assistance that is available.

From a business’s perspective, the company’s strategic plan is key in considering and making location/expansion decisions. Incentives available help to drive such decisions. For example, if the business is intent on expanding through research and developments, it certainly is looking for research and development tax credits; if it is in a “green” industry or focused on “green initiatives,” incentives promoting investment or tax credits with green intent are key. Similarly, those looking to hire employees trained in their industry or with certain technology skills are looking for jobs program tax credits and training program incentives.

When evaluating incentives, too, businesses should consider not only what is being offered but what expectations/requirements are tied to those incentives. If they commit to investing in a community and hiring a certain threshold of employees, but find they are unable to meet their commitments, what are the possible ramifications? Many incentive or grant programs have clawback or recapture provisions that allow the granting jurisdiction the authority to be paid back when the specific targets are not met. They should consider whether the goals and targets are realistic and obtainable given their own research regarding the jurisdiction and considering their strategic plan.

Sometimes jurisdictions have negotiable incentives that may or may not be widely known. We encourage companies considering expansion or relocation options to ask not only about the statutory and discretionary incentives but also about what else the jurisdiction may be able to offer (and what they would expect in return). Published or nonpublished incentives may be in the form of cash grants, preferred financing, utility discounts and cost offsets and cost avoidance (employee training offsets, infrastructure incentives, technology assistance, transportation cost offsets). However, unless they ask, they may never know and may miss out on incentives that could have made the difference in a location decision.

Credits and incentives promote activity and investment in a jurisdiction. As noted above, they often result in a win-win situation for both the jurisdiction offering and the businesses on the receiving end. States and localities offer them but it is incumbent upon a business to seek and explore opportunities consistent with and in furtherance of its strategic goals.

Terry Barrett is a Tax Senior Manager at Keiter. Terry focuses on state and local tax consulting, and primarily non-income tax issues, such as sales and use tax, and business license and personal property tax, in Virginia and other states.

1. “Amazon has released a ‘short’ list of cities it’s considering for its second headquarters,” CNN, Jan. 18, 2018.