State Tax Incentives Newsletter

A. Administrative Changes

First, new Department of Revenue Director, Betsy Carpentier, stepped in as Chairman of the Subcommittee of the Coordinating Council Committee. (Maybank had served as Chairman of the Committee since its inception.) Very recently Renee Oswald replaced Murk Alexander. Ms. Oswald now serves as Program Director, Global Business Finance Division. Last year, Karen Blair Manning replaced Claudia Davant DeLoach as legal counsel.

B. Legislative Changes

The General Assembly passed legislation which places the decision to grant Enterprise Zone benefits solely within the discretion of the Coordinating Council (i.e., a business does not have a "right" to Enterprise Zone benefits merely because it meets the minimum requirements of the Act). The legislation also made optional the Council.s duty to establish criteria for the determination and selection of qualifying businesses and the approval of revitalization agreements.

The new law also provides explicitly that the definition of "new job" for Enterprise Zone purposes is the same as contained in the Jobs Tax Credit Act.

Lastly the General Assembly established an additional Enterprise Zone program for tire manufacturers with more than $425 million in capital investment and more than 1,000 employees and who commit to investing an additional $350 million and creating an additional 350 jobs. The chief benefit of the new program is that the Job Development Credit will include the increase in sales and use taxes paid by a qualifying tire manufacturer.

Legislative Update

A. Property Tax Incentives

1. TIFs

Several important changes were made to the Tax Increment Financing District legislation. First, Counties are now authorized to create TIFs. (Prior to the legislation, only cities could create TIFs.) Second, taxing entities within the TIF (most importantly, school districts) now have the ability to opt out entirely or opt in to a limited extent on a proposed TIF district.

Third, current municipal TIF language was modified to expand the ownership of redevelopment projects. Lastly, references to special source revenue bonds were added to the TIF statutes in order to clarify allocations of fee-in-lieu payments.

2. Accelerated Depreciation for High Tech Manufacturers

Various Constitutional and statutory provisions require property to be valued at FMV for property tax purposes. FMV for a manufacturer.s machinery and equipment is determined by reducing the original cost by an annual allowance for depreciation. S.C. law provides a detailed depreciation schedule for various manufacturers, as well as for certain specific machinery and equipment. The manufacture of "electrical equipment" has three separate depreciation schedules (11%, 15%, and 30%), depending upon the type of equipment being manufactured. The most rapid allowance contained in the South Carolina Code for depreciation --30%-- is allowed for the manufacture of certain electronic devices which are included in computers and computer peripherals. The statutory definition of "computer peripherals" was antiquated and it did not make clear what machinery and equipment owned by, for example, a chip manufacturer would be entitled to the accelerated depreciation. Accordingly, the statute was amended to include specifically semi- conductor and semi- conductor devices, substrates, flat panel displays, which are incorporated into computer or other computer peripherals or other electronic control applications, and telecommunications devices. Lastly, the definition of "computer peripherals" was amended to include "routers [and] servers."

In addition, a new depreciation schedule -- 10%-- was established for Class 100 clean rooms. This depreciation schedule includes the associated mechanical systems, process piping, environmental systems and water purification.

These technology friendly amendments were part of Governor Hodges. initiatives to attract high tech jobs to South Carolina.

3. Fee-in-Lieu: Reduction of the Minimum Investment in State.s Poorest Counties

The minimum investment for fee-in-lieu is generally five million dollars. New legislation, consistent with the Governor.s agenda to support rural counties, now provides that, if a county has an average unemployment rate of at least twice the state average during each of the last two calendar years, the minimum level of investment is one million dollars.

The following counties had an unemployment rate that was at least twice the state average for both 1996 and 1997: Georgetown, Marion, Marlboro, and Williamsburg.

Although no official list of counties has been released, it would appear that the counties now eligible include Chester, Georgetown, Lee, Marion, Marlboro, and Williamsburg.

4. Fee-in-Lieu:

Replacement Property

Several years ago the various fee statutes were amended to provide that the Fee Agreement could include replacement property (i.e., newly acquired machinery and equipment that replaces machinery and equipment which was included in the Fee Agreement.) New legislation now provides that replacement property is deemed to replace the oldest property subject to the fee, whether real or personal, which is disposed of in the same property tax year as the replacement property is placed in service.

B. Sales Tax Incentives

1. Clothing Owned by Chip Manufacturers

As part of the Governor.s high tech initiatives, a new sales tax exemption is added for clothing ("bunny suits") and other attire for Class 100 or better clean room environments.

C. Income Tax Incentives

1. Corporate Tax Moratorium Expanded for State.s Poorest Counties

Current law provides for a ten-year corporate income tax moratorium for certain employers who (in part) create at least 100 new jobs in a county with unemployment at least twice the state average during the last two calendar years. New legislation adds the three lowest per capita income counties, based on the average of the three most recent years of average per capita income data.

Under prior law, Georgetown, Marlboro, Marion, and Williamsburg counties qualified. Although nothing official has been announced, it appears that the three counties qualifying under the new proviso would be Lee, Allendale, and Williamsburg. Since Lee and Williamsburg already qualify, it would appear that only Allendale will be added by the new per capita income criteria.

2. Job Tax Credit

The definition of "new job" was amended to include existing jobs at a facility of an employer which are reinstated after the employer has relocated due to involuntary conversion as a result of condemnation or the exercise of eminent domain by federal, state, or local government.

3. New Method for Allocation and Apportionment of Multi-State Taxpayer.s Income

South Carolina law offers several alternatives to multi-state taxpayers for the allocation and apportionment of their income for corporate income tax purposes. One alternative was passed several years ago in part to aid economic development and also to alleviate taxpayers. concerns over the South Carolina Supreme Court decision in Geoffrey. This alternative, drafted by Rick Handel at the Department of Revenue, allows certain multi-state taxpayers to enter into a contract with the Department of Revenue to establish the allocation and apportionment of the taxpayer.s income for a period not to exceed five years. The General Assembly added a new method. Taxpayers may now enter into a ten year contract (up from five years in the original method) if they create: (1) at least $10 million capital investment; plus (2) at least 200 new full time jobs with an average cash compensation level of more than three times the per capita income of the State at the time the jobs were filled. The BEA reported for 1998 that the per capita income in South Carolina was $21,309. Therefore, for jobs created in 1998, it would appear that an average compensation level of more than $63,927 would be required. The figure for 1999 will not be available until April of 2000.

4. Corporate Headquarter.s Credit and Qualified Services Related Facility - Calculation of Compensation Level

Current law requires, in part, that qualifying jobs must have on average cash compensation level of more than a certain percentage of the per capita income level of this State. Prior law required the per capita income level to be met at the time the jobs were filled. New legislation establishes that the requirement must be based on the most recent per capita income data available as of the end of the taxpayer.s taxable year in which the job is filled.

A similar provision was added to the definition of "Qualified Service Related Facility."

5. Pass Through Provisions Clarified

Historically only C Corporations qualified for South Carolina.s economic development incentives. Several years ago the General Assembly changed the law in order to qualify other entities (LLCs, LPs, S Corporations, etc.) This year the General Assembly passed technical corrections to clarify the pass-through provisions of the Jobs Tax Credit.

D. Miscellaneous

1. Utility Tax Credit

One of the most popular provisions of the Rural Development Act allows a utility a tax credit of up to $300,000 a year when a utility donates monies used to provide qualifying infrastructure for certain projects. (Qualifying infrastructure includes such items as improvements to public or private water, sewer, electric, natural gas, or telecommunication systems.) This year, at the urging of the Electric Cooperative Association, the General Assembly provided that qualifying improvements now also include industrial shell buildings and the purchase of land for an office, business, commercial, or industrial park which is constructed by a county or political subdivision of the state.

2. Transfer of Film Office

The South Carolina Film Office was transferred from Parks Recreation and Tourism to the Department of Commerce.

3. Limitation on Local Impact Fees

The General Assembly through passage of the South Carolina Impact Fee Act has limited local government.s ability to impose impact or Development Impact Fees.

4. Habitat Management Credit

A tax credit has been created equal to 50% of the costs incurred by a taxpayer for habitat management and improvements to land that has been approved by the Department of Natural Resources. The costs must have been incurred with respect to land that has been designated as a certified Management Area. The DNR will promulgate regulations that set forth criteria for the credit.

New Department of Revenue Policy Document on Calculating the Job Tax Credit

In January, the Department of Revenue issued a lengthy policy document on computing the Job Tax Credit (It.s not as easy as you think!) The document, Revenue Ruling #99-5, was primarily authored by Deana West, and does an excellent job of explaining a complex subject.