COVID-19 business disruptions put Oklahoma tax incentives at risk

Attorney Q&A with Tony Mastin

Tax incentives are increasingly used by cities, and sometimes states, to lure businesses to the area. Most involve some sort of tax break for the incoming business in return for negotiated levels of capital investment, quality jobs or new revenues generated.

With the breakout of the new coronavirus, companies globally are forced to weather dramatic drops in business and many are forced to lay off employees. These negative outcomes could affect businesses that have received incentives in the past if the terms of their agreements can’t be met.

In this LINC Q&A video, McAfee & Taft tax lawyer Tony Mastin examines the potential of additional economic hits to Oklahoma businesses already struggling through the pandemic downturn who are also recipients of one or more of the state’s tax incentives that have specific performance provisions.

Transcript

Q: As businesses look to reopen and recover, what issues are there to consider to maintain state tax incentives they have previously received?

A: State law provides many tax incentives in the forms of refunds, incentive payments, tax credits and exemptions for companies to relocate to Oklahoma, to increase payroll, to increase the number of employees that they have. But tied to those incentives are a requirement that they maintain payroll levels or the number of employees. And if those companies have been forced to reduce their payrolls or number of employees, they’re in danger of losing those tax incentives that were previously provided to them.

Q: What is one of the more successful incentives and how is it at risk if recipient experiences a decrease in payroll or reduces wages?

A: A very popular incentive for recruiting companies here in Oklahoma is the Quality Jobs Incentive Program. Under that program, incentive payments are made to the company of up to 5% of their payroll for up to 10 years for providing increased jobs here in Oklahoma. As a requirement for that, they are required to have a minimum average payroll, or wages per employee, a payroll of up to $2.5 million within three years of signing the incentive payment contract, and also provide insurance benefits to those employees. But the statute requires if they do not meet that minimum threshold of $2 1/2 million of total payroll, then they will lose those incentive payments. And if the wages, the average annual wages, drop below the minimum requirement, then those payments can be suspended.

Q: Are there incentives tailored for manufacturers that increase payroll and how are they impacted?

A: Yes, so one of the major incentives for manufacturers in Oklahoma is a property tax exemption for a period of five years. And that’s available for manufacturers that construct a new facility in Oklahoma, expand an existing facility, or acquire a new one. To maintain that property tax exemption for a period of five years, the manufacturer must maintain their base payroll amount, which is the payroll that they had when they started the exemption for a period of five years. And if they fall below that, then they lose the exception, not only for that year, but for the balance of the program. In the past when this has happened, I think to the recession in 2008, manufacturers asked for relief from the tax commission who determined that they simply did not have authority under the statute to provide any kind of equitable relief in nature do to the poor economic conditions.

Q: Are there incentives for the creation of new jobs?

A: There’s an investment tax credit for corporate and individual manufacturers, also provides for aircraft maintenance facilities and some other type facilities of up to 1% of the cost of property that they invest in their company, of if they increased their number of jobs, they could get an income tax credit of $500 per employee. If they take the credit based upon the number of employees, they’re required for a period of five years to maintain that level of employees. The incentive was $500 per employee for a period of five years. But they lose that, again, if they’ve reduce their payroll, especially during this time due to the COVID-19 pandemic.

Q: Are there incentives for the creation of new jobs?

A: There’s a sales tax refund available for purchases of computers, data processing equipment, or communication equipment for the companies that provide computer services, data processing services. But to get that refund, they’re required to created at least 10 new jobs with a minimum average salary of $35,000 for a period of three years. If that number of employees drops below that amount, not only did they not qualify for the refund, but a refund they’ve already received must be paid back to the state.

Q: Are there Oklahoma companies who are at risk of losing eligibility for these tax incentive programs?

A: For manufacturers who take advantage of the property tax exemption, the last report I saw from 2019, there were approximately 200 manufacturers, over 53 counties enjoying that. There’s a large number of quality job incentive payment recipients. How many of those are in danger of losing these is unknown at this time because you still have the end of the year. But as the companies open back up, and they make business decisions because of the impacts they’ve felt because of the pandemic, they need to keep these incentives in mind so they don’t lose them.

Q: Are there any remedies under consideration that would mitigate any losses of these incentives?

A: Senate Bill 1075 has been passed by the legislature and is awaiting the signature by the governor that would provide that Quality Jobs Incentive payment recipients who’ve had a drop in payroll between April 1 of this year and June 30th of next year, will continue to receive those payments even if they experience the drop in payroll. That bill is awaiting the governor’s signature.

Q: What should Oklahoma companies who have received state tax credits be doing?

A: Any business that’s taken advantage of these tax incentives should seek legal counsel, talk to a tax practitioner to determine what the parameters are to find out if they are, in fact, in danger of losing these incentives because of what’s going on in their business today.

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This Attorney Q&A has been provided for information of clients and friends of McAfee & Taft A Professional Corporation. It does not provide legal advice, and it is not intended to create a lawyer-client relationship. Readers should not act upon the information in this Q&A without seeking professional counsel.