| Date: | 05/31/2006 |
|---|---|
| Organization: | Massachusetts Department of Revenue |
| Referenced Sources: | Massachusetts General Laws |
Corporate/Personal Income Tax/Sales and Use
Please Note: Technical Information Release 06-01 was issued under the prior film credit Act. The discussion of law section of these public written statements is modified, in part, by the new law as outlined in Technical Information Release 07-15.
The Massachusetts Legislature recently enacted personal income tax and corporate excise credits and sales tax exemptions that provide incentives to the motion picture industry ( the "Act"). See St. 2005, c. 158; amended by St. 2005, c. 167. In particular, these credits and exemptions apply to a qualifying motion picture production company and the sales tax exemption also applies to a qualifying film school student. This Technical Information Release provides an explanation of the Act's requirements and effective dates.
1. Personal Income Tax and Corporate Excise Credits
For taxable years beginning on or after January 1, 2006 and before January 1, 2013, the Act provides two tax credits that can be taken by a motion picture production company (the "taxpayer") against either its personal income tax or corporate excise liabilities. M.G.L. c. 62, § 6(l) and c. 63, § 38T. Each credit has its own qualification requirements and a taxpayer is allowed to qualify for and claim both credits; however, the total amount of tax credits allowed to any one motion picture shall not exceed $7,000,000.
The credits may be used or transferred by any taxpayer within the meaning of chapter 63, including financial institutions, utility corporations and insurance companies, and by corporations that are exempt from taxation under Internal Revenue Code ("Code") § 501. Insurance companies may apply the credit against the insurance premiums tax. See M.G.L. c. 63, § 20 et. seq. Corporations that are exempt from tax under Code § 501 may apply the credit against the tax on unrelated business income. See M.G.L. c. 63, § 38T. Flow-through entities may pass the film credits through to partners, members or owners in proportion to their sharing of other tax or economic attributes of the entity.
A. Payroll Credit
A taxpayer is allowed a credit for the employment of persons within the Commonwealth in connection with the filming and production of a motion picture as explained below. The credit is equal to 20 per cent of the total qualifying aggregate payroll of the motion picture. Only actual payments to employees may be used to determine the qualifying aggregate payroll, and only in the instance in which the payment constitutes Massachusetts source income [1] to the recipient. Qualifying aggregate payroll may also include fringe benefits to employees to the extent such benefits constitute Massachusetts source income. For example, the qualified transportation fringe benefit of employer-provided parking may be included in the qualifying aggregate payroll to the extent it is included in Massachusetts source income to the recipient. [2] The qualifying aggregate payroll shall not include any payments made to an employee when the total payments made to, or to be made to, such employee in connection with the motion picture are equal to or greater than $1,000,000 ("High Salary Employee"). Such High Salary Employee's entire salary, not merely the amount of his or her salary equal to or greater than $1,000,000, is excluded from the payroll credit.
To qualify for the payroll credit the taxpayer must incur in the Commonwealth total production expenses of at least $250,000 in a consecutive twelve-month period ("the $250K qualification period"). If the taxpayer engages in the making of more than one motion picture in the Commonwealth, the preceding requirement must be met for each motion picture . If the taxpayer seeks to assert a $250K qualification period in connection with two or more motion pictures, the common expenses between the motion pictures, if any, must be reasonably apportioned between the motion pictures. For purposes of satisfying the requirements of the $250K qualification period, multiple episodes of a "television series" or multiple "commercials" that are created for the same client may be aggregated to qualify as a single motion picture. [3]
Only aggregate payroll paid by the taxpayer during the $250K qualification period will qualify for the payroll credit. The $250K qualification period serves as the "determination" period in that the taxpayer must incur in the Commonwealth at least $250,000 of total production expenses during the consecutive twelve month period to be eligible for the payroll credit. Also, this same period serves as the "qualification" period in that only qualified aggregate payroll expenses paid during this determination period qualify for the payroll credit. In some cases, the taxpayer may be able to choose between one or more possible $250K qualification periods. However, only one $250K qualification period is allowed for each motion picture and only the aggregate payroll expense incurred within the chosen period qualifies for the payroll credit . A taxpayer may choose to have a $250K qualification period that is less than 12 months, but may not subsequently reopen or extend this qualification period in order to claim more qualifying expenses. In addition, as noted below, the $250K qualification period is the same for the payroll credit, the production expense credit and the sales tax exemption. Consequently, the choice of the $250K qualification period (including choosing a period shorter than 12 months) may have a bearing on the application of the production expense credit and the sales tax exemption, as further discussed below.
Example 1: A taxpayer engages in the making of a motion picture and incurs $150,000 of total production expenses in the Commonwealth in December, 2006 of which $50,000 constitutes qualifying aggregate payroll. In January, 2007 the taxpayer incurs an additional $200,000 of total production expenses in the Commonwealth of which $75,000 constitutes qualifying aggregate payroll. Because the taxpayer has incurred at least $250,000 of total production expenses in the Commonwealth within a consecutive twelve-month period, it may now qualify for the payroll credit for the $50,000 of qualifying aggregate payroll paid in 2006 and for the $75,000 of qualifying aggregate payroll paid in 2007. The taxpayer may choose the consecutive two-month period, December, 2006 to January, 2007, as its $250K qualification period and thereby may claim the payroll credit (20% X $125,000) after January, 2007.
Example 2: Same facts as in example 1 above, however the taxpayer continues to engage in the making of the same motion picture in 2007 and incurs $20,000 of aggregate payroll in each month for February through December, 2007. The taxpayer has incurred aggregate payroll expenses for a period of thirteen months and has the option to choose one of two consecutive twelve-month periods as its $250K qualification period. Under the facts of this example, by choosing December, 2006 through November, 2007 as the $250K qualification period, the taxpayer will be able to claim $50,000 of qualifying aggregate payroll paid in 2006 and $275,000 of qualifying aggregate payroll paid in 2007. If it chooses this period, the payroll credit (20% x $325,000) may be taken by the taxpayer after November, 2007.
B. Production Expense Credit
A taxpayer is allowed to claim a credit equal to 25 per cent of its Massachusetts production expenses, not including the qualifying aggregate payroll expenses included in the calculation of the taxpayer's payroll credit, so long as such taxpayer is eligible to claim the payroll credit in connection with the same motion picture. To qualify for the 25% production credit, the taxpayer's Massachusetts production expenses must exceed 50 per cent of its total production expenses incurred in connection with the motion picture or, alternatively, at least 50 per cent of the taxpayer's total principal photography days spent filming the motion picture must take place in the Commonwealth.
When a taxpayer makes salary payments to a High Salary Employee that would otherwise constitute qualifying aggregate payroll but for the fact that the employee is a High Salary Employee, those payments may be included in the calculation of the production expense credit. The entire salary paid to a High Salary Employee that is equal to or greater than $1,000,000 may be used to calculate the production expense credit including the portion of such salary that is less than $1,000,000 (provided that such entire salary is excluded from the payroll credit, for which it does not qualify).
Example: A taxpayer engages in the making of a motion picture and incurs $75,000 of total production expenses in the Commonwealth in the three months, December, 2006 through February, 2007 ($25,000 each month), of which $30,000 constitutes qualifying aggregate payroll ($10,000 each month). Also, during the nine months, March, 2007 through December, 2007, the taxpayer incurs an additional $200,000 of total production expenses in the Commonwealth ($20,000 each month) of which $100,000 constitutes qualifying aggregate payroll ($10,000 each month). It is presumed for purposes of this example, that the taxpayer's Massachusetts expenses exceed 50 per cent of its total production expenses incurred in connection with the motion picture or that alternatively at least 50 per cent of the taxpayer's principal photography days spent filming take place in Massachusetts.
The taxpayer is able to claim that it has incurred at least $250,000 of total production expenses in the Commonwealth during two distinct, consecutive twelve-month periods. First, it may claim that it incurred $255,000 in production expenses during the twelve-month period, December, 2006 through November, 2007, of which $120,000 constitutes qualifying aggregate payroll. Second, it may claim that it incurred $250,000 of production expenses during the twelve month period, January, 2007 through December, 2007, of which $120,000 constitutes qualifying aggregate payroll. The taxpayer is eligible for the payroll credit for either of these two periods, as is required for purposes of the production expense credit.
The taxpayer chooses the twelve-month period, December, 2006 through November, 2007, as its $250K qualification period. For this period, the taxpayer will have a production expense credit of $33,750 (25% X $135,000) and a payroll credit of $24,000 (20% X $120,000) for a total tax credit benefit of $57,750. Note that if the presumption stated above concerning the relationship between the taxpayer's in-state expenditures/activities to its total expenditures/activities is not met, the taxpayer would not be entitled to the production expense credit, but would still be entitled to said payroll credit.
2. Sales Tax Exemptions
For taxable years beginning on or after January 1, 2006 and before January 1, 2013, the Act provides sales tax exemptions that can be asserted by a qualifying motion picture production company or a qualifying film school student. M.G.L. c. 64H, § 6(ww). Production expenses that qualify for the sales tax exemption under the Act may also qualify for the production expense credit.
A. Motion Picture Production Company Sales Tax Exemption
A sales tax exemption is allowed to a taxpayer for production costs incurred in the Commonwealth. In order to qualify for the sales tax exemption, a taxpayer must incur at least $250,000 in total production costs in the Commonwealth during a consecutive twelve-month period and must be conditionally pre-approved as a qualifying company by the Commissioner. The twelve month period that a taxpayer may use for purposes of the sales tax exemption is the same $250K qualification period that applies for purposes of the payroll and production expense credits, discussed above. The taxpayer must file with the Commissioner an estimate of expenditures to be made in the Commonwealth in connection with the production of the motion picture prior to the commencement of the filming in the Commonwealth. Also, the taxpayer must designate a representative as a primary liaison with the Commissioner for the purpose of facilitating the proper reporting of expenditures and other information as required by the Commissioner.
The taxpayer must file the Online Estimate Film Incentive Form [4] ("estimate form") to receive conditional pre-approval by the Commissioner and thereafter may utilize the sales tax exemption for production costs incurred in the Commonwealth by giving its vendors an exempt use certificate. The taxpayer must also receive approval by the Secretary of Economic Development ("Secretary"). If the taxpayer commences filming in the Commonwealth and then subsequently files the estimate form, only in-state purchases made subsequent to the conditional pre-approval of said form will qualify for the sales tax exemption.
Any taxpayer that has been conditionally pre-approved for the sales tax exemption that then fails to expend the requisite $250,000 within a consecutive twelve month period or that fails to file the estimate form or receive approval from the Secretary and the Commissioner shall be liable for the sales taxes that would have been due had the conditional pre-approval not been initially granted. The sales taxes shall be considered due as of the date that the taxable expenditures were made.
Only production expenses constituting tangible personal property purchased during the $250K qualification period will qualify for the sales tax exemption.
Example: A taxpayer receives approval from the Secretary. Then it files an estimate form on May 1, 2006, resulting in its pre-approval by the Commissioner as a qualified motion picture company, and commences filming a motion picture on this same date. The taxpayer purchases $40,000 of production expenses constituting tangible personal property between May 1, 2006 and June 30, 2006 and claims the sales tax exemption by presenting an exempt use certificate to each vendor.
Also, during this same two-month period the taxpayer incurs $100,000 of qualifying aggregate payroll and an additional $110,000 of qualifying production expenses that are not qualifying aggregate payroll. The taxpayer claims as its $250K qualification period, the twelve-month period May, 2006 through April, 2007, during which time it has exactly $250,000 in qualifying production expenses. In addition to its sales tax exemptions, the taxpayer is entitled to claim the payroll credit in connection with its $250K qualification period. Also, assuming that the taxpayer's Massachusetts expenses exceed 50 per cent of its total production expenses incurred in connection with the motion picture or that alternatively at least 50 per cent of its principal photography days are spent filming in Massachusetts, the taxpayer is entitled to claim the production expense credit as to its $250K qualification period.
Note that if the taxpayer fails to reach the $250,000 threshold for the twelve-month period referenced, it is not entitled to either the payroll or production expense credit. Also, in the latter event, the taxpayer would become liable for the sales taxes that would have been due had its conditional pre-approval not been initially granted. The latter sales taxes would be considered due as of the date that the taxable purchases were made.
B. Film School Student Sales Tax Exemption
Accredited film school students are allowed a sales tax exemption for production expenses incurred in the Commonwealth related to a school film project. Such students may utilize the sales tax exemption for production expenses incurred in the Commonwealth by giving their vendors an exempt use certificate.
3. Other Requirements
A. Withholding, Payments, and Profits: Payroll & Production Expense Credits
A taxpayer must be registered [5] for withholding of Massachusetts personal income tax and must withhold from its payroll expenses in order for the payments to qualify as an aggregate payroll expense for purposes of the payroll credit or to qualify as a Massachusetts production expense for purposes of the production expense credit. The Commissioner will require withholding whether or not the amounts paid are to "employees" or constitute "wages" as defined in M.G.L. c. 62B, § 1. The salary paid must be Massachusetts source income to the recipient [6], and further, must not be a payment representing the employee's participation in profits from the motion picture, in order to qualify as part of the aggregate payroll expense for purposes of the payroll credit or to qualify as a Massachusetts production expense for purposes of the production expense credit.
B. Transfer, Sale or Assignment of Credits
A taxpayer subject to the personal income tax under chapter 62 or the corporate excise under chapter 63 may transfer, sell or assign either the payroll or production expense credit, in part or in whole, to one or more other taxpayers that are subject to the personal income tax under chapter 62 or taxpayers subject to the corporate excise under chapter 63.
Any taxpayer, including a transferee, buyer or assignee, desiring to make a sale, transfer or assignment of the credits (the "transferor") shall obtain a certificate of eligibility to transfer, sell or assign the credits. [7] The transferor must submit to the Commissioner a statement in the form prescribed by the Commissioner that details the amount of tax credit being sold, transferred or assigned and any other information required by the Commissioner. A tax credit shall not be transferred, sold or assigned without a certificate of eligibility issued by the Commissioner. Transferors that have an outstanding tax obligation with the Commonwealth in connection with any motion picture for any prior taxable year are not eligible for certificates of eligibility to transfer, sell or assign the credits.
C. Refundability and Carryover of Credits
The payroll and production expense credits are nonrefundable. The credits may not reduce the corporate minimum excise. Any credit amount that exceeds the taxpayer's tax due for a taxable year may be carried forward by the taxpayer to any of the taxpayer's five subsequent taxable years. Transferees, buyers or assignees may use and carry forward the credits to any of the five subsequent taxable years subsequent to the first taxable year the credits were allowed to the initial transferor. Transferring, selling or assigning a credit does not extend the five-year carry forward period.
D. Loan Default
A taxpayer (including an owner, parent or affiliate of the taxpayer) is not eligible for the payroll or production expense credit or the sales tax exemption if it is in default on a loan made by the Commonwealth or a loan guaranteed by the Commonwealth.
4. Definitions (as applied under the Act)
"Commissioner" , the Commissioner of Revenue.
"Motion picture" , a feature-length film, a video, a television series defined as a season not to exceed 27 episodes, or a commercial made in the Commonwealth, in whole or in part, for theatrical or television viewing or as a television pilot. The term "motion picture" shall not include a production featuring news, current events, weather and financial market reports, a talk show, a game show, sporting events, an awards show or other gala event, a production whose sole purpose is fundraising, a long-form production that primarily markets a product or service, a production containing obscene [8] material or performances, a production used for corporate training or in-house corporate advertising, or other similar-type productions.
"Motion picture production company" , a company including its subsidiaries engaged in the business of producing motion pictures. The term "motion picture production company" shall not mean or include any company or person which is in default on a loan made by the commonwealth or a loan guaranteed by the commonwealth.
"Massachusetts production expense" , a production expense for the motion picture clearly and demonstrably incurred in the commonwealth.
"Parent, owner or affiliate", any person or entity that more than 25 per cent owns, controls or is affiliated with the taxpayer.
"Principal photography days" , the phase of production during which the motion picture is actually filmed. The term shall not include preproduction or postproduction.
"Production expense" or "production cost" , preproduction, production and postproduction expenditures directly incurred in the production of a motion picture. The term shall include wages and salaries paid to individuals employed in the production of the motion picture; the costs of set construction and operation, editing and related services, photography, sound synchronization, lighting, wardrobe, makeup and accessories; film processing, transfer, sound mixing, special and visual effects; music; location fees and the cost of purchase or rental of facilities and equipment or any other production expense. The term shall not include costs incurred in the marketing or advertising of a motion picture, any costs related to the transfer of tax credits or any amounts paid to persons or businesses as a result of their participation in profits from the exploitation of the production.
"Secretary", the Secretary of Economic Development.
5. Miscellaneous Provisions
The Act provides that upon application by a motion picture company, the Secretary shall make a determination regarding the inclusion of the name "Commonwealth of Massachusetts" in the credits of any picture filmed or produced in the Commonwealth.
The Act further provides that a department or agency of the Commonwealth shall not charge a fee or other cost, except a charge for extraordinary activities or a charge for costs actually incurred by the affected department or agency for the use of state-owned property for the purpose of making a motion picture. An extraordinary activity shall mean an activity outside the normal course of business of an agency or department including, but not limited to, demolition or construction projects.
/s/ Alan LeBovidge
Alan LeBovidge
Commissioner of Revenue
AL:MTF:jmw
May 31, 2006
TIR 06-1