This summer, California Governor Jerry Brown signed new legislation which will bring an end to the current Enterprise Zone Program in the state. The new legislation will effectively terminate the current Enterprise Program as of December 31, 2013. Carryover of any unused credits from the Enterprise Zone program, which were previously unlimited, will now be limited to a 10 year period.
In its place, California will now offer 3 new incentive programs under a new Economic Development Program (EDP). Approximately $750 million of state funds will be redirected from the Enterprise Zone program to these new incentives.
Partial Sales/Use tax exemption for Manufacturing and Research & Development Equipment
This program, offered statewide, will replace the current Enterprise Zone Sales Tax Credit and will allow for a reduction in the sales tax paid by qualified taxpayers for the purchase of equipment utilized in manufacturing or Research & Development (R&D) activities. The amount of the sales tax reduction is approximately 4.19%, which represents a nearly 50% decrease in the current California sales tax rate.
Generally, the sales tax exemption will be available to taxpayers primarily involved in manufacturing, R&D in biotechnology, or R&D in physical engineering and life sciences. (Equipment which qualifies for the manufacturing exemption must be used at least 50% of the time between the point where raw materials are received and the manufacturing process begins and ends when the materials are altered to their completed form. Thus, equipment used in pre or post manufacturing activities, such as, raw material or finished goods storage, would not qualify for the reduced sales tax exemption.)
In order to qualify for the exemption, the taxpayer must obtain an exemption certificate from the State Board of Equalization before making any qualified purchases. (A maximum of $200 million of qualified purchases by a taxpayer will be permitted under this program- this maximum will be applied to all taxpayers in a combined group.)
It should be noted that this new partial sales tax exemption does not begin until July 1, 2014 and will be effective through June 30, 2022. This effective date should be considered for taxpayer’s anticipating purchases which would be eligible for the reduced sales tax rate.
New EDP Hiring Credit
A new hiring credit, effective January 1, 2014, is available for hiring new employees who are long-term unemployed, certain veterans, ex-felons or individuals who are recipients of the federal earned income tax credit or receive other federal or state assistance. Employers must demonstrate a net increase in jobs statewide to take advantage of this credit. This credit is available for employers located within certain geographic areas (including former Enterprise Zones).
Taxpayers eligible for the hiring credit do not include the following:
- Employers that provide temporary help services
- Employers that provide retail trade services
- Employers engaged in food services
- Employers engaged in the casino and bar industry
- Sexually oriented businesses
The amount of the hiring credit is equal to 35% of wages paid in the first five years of employment, but only for wages paid between 150% and 350% of the California minimum wage. Employers are required to request a “tentative credit reservation” (TCR) from the Franchise Tax Board within 30 days of complying with the new hire reporting requirements. It should also be noted that the credit must be claimed on an original return, thus there is no “second chance” to go back and claim a missed credit on an amended tax return.
EDP California Competes Tax Credit
A unique program, to be administered by GO-Biz and an appointed committee, will create a new fund which will negotiate with businesses and will provide tax credits for investments and expanded employment in California. There is no defined credit computation amount under this program. Essentially, businesses will be competing for available credits under this program. The statue indicates that the criteria for the award of credits will be based on the number of jobs to be created or retained, the extent of poverty in a business development area, a minimum compensation limitation and a set job retention period. Unlike the former Enterprise Zone program, there are no geographic limitations under the California Competes Credit.
For the initial year of this credit (2014), the state has allocated $30 million of funding. This will increase to $150 million for 2015, then rising to $200 million in 2016. It should be noted, funding for this credit will be offset by the amount needed to keep the overall cost of all three incentive programs to no more than $750 million, making it possible that there could be limitations on the funding available for this program.
These new incentives create additional opportunities for California businesses, and in many cases, broaden their appeal beyond the geographic restrictions of the former Enterprise Zone program. However, as discussed above, certain steps must be taken by taxpayers ahead of time to take full advantage of these incentives.
Please contact your Marcum State and Local tax professional for further information or to determine how your business may benefit from these new programs.
|A special thanks to article contributor Dan Effron, Partner, Tax & Business and National Leader, State and Local Tax Practice Group.|