| Date: | 06/19/2009 |
|---|---|
| Organization: | Massachusetts Department of Revenue |
| Referenced Sources: | Massachusetts General Laws |
Tax Administration
I. Introduction
This Technical Information Release sets forth the Department of Revenue's (DOR) role in implementing St. 2006, c. 293, §§ 5 - 12, part of An Act Relative to the Economic Development of the Commonwealth, as modified by St. 2008, c. 129, relating to financial assistance for public infrastructure improvements (the Act). This TIR modifies TIR 08-18, and is effective retroactive to the date of issuance of TIR 08-18 (November 28, 2008). Comprehensive guidance for the approval process is found in regulations issued by the Secretary of Administration and Finance (A&F), at 801 CMR 51.00 (A&F Regulations). Under the Act, the Massachusetts Development Finance Agency (MDFA) is authorized to issue bonds to finance infrastructure improvements that will support economic development projects. The funds from the bonds may be used to finance the construction of streets, sidewalks, water and sewer service, and similar improvements.
Approval of a project to be funded by bonds issued pursuant to the Act is a multi-stepped process set forth in the A&F Regulations and the Act. Each proposal from a developer must include, among other things, a financial analysis estimating the new state tax revenues to be generated as a result of each project component of the development. Part of the approval process requires the DOR, to the extent practicable, to certify that the amount of new state tax revenues allocable to the project will be at least equal to 1.5 times the projected annual debt service, as determined by A&F, on the bonds to be issued to fund the public infrastructure improvements related to the project. Subsequently, the DOR must annually determine and certify the new state tax revenues generated by each project component, after the DOR has received the relevant data necessary to make the determination, and must determine the extent of any resulting shortfall after comparing new state tax revenues with the allocable annual debt service on the bonds that is apportioned to each component.
This Technical Information Release should be read in tandem with the A&F Regulations. The A&F Regulations describe in detail the application process. This TIR describes the role of the DOR in approving and certifying projects, and in determining any shortfall with respect to an approved project. Interested persons must contact the municipality where the project is to be located for guidance on the local approval processes. DOR or the Secretary of A&F may supplement this TIR with further guidance at a later date. Note that terms used in this document are defined in the Act or in the A&F Regulations.
II. Department of Revenue Role in Project Approval
Prior to a project being eligible for financing under the Act, the developer is required to obtain preliminary project approval from A&F. Among other filings detailed in 801 CMR 51.06, the developer must file its Preliminary Economic Development Proposal with the Commissioner of Revenue (Commissioner). In accordance with the procedures at 801 CMR 51.07(5), if the project meets the regulatory criteria for preliminary approval, the Commissioner will issue a preliminary certificate. For final project approval, the Commissioner must provide an updated version of the certificate reflecting any changes. See 801 CMR 51.13(1). In general, the same DOR review criteria apply to preliminary project approval and to final approval. See 801 CMR 51.03, 51.12, 51.13.
1. General requirements
In performing its review function under the approval process, DOR will require sufficient detail about the developer's data, estimates, calculations, methodology, and other information as to each of the relevant types of new state tax revenues so that DOR will be able to make a judgment concerning the reasonableness of the developer's information, estimates and projections (where applicable), conclusions, and other items submitted. Estimates and projections, where applicable, are to be forecasted on an annual basis for the expected term of the bonds; data for each project component of the project must be presented separately as well as being presented as an aggregate of the new state revenues to be generated by all project components of the project. See St. 2006, c. 293, § 7(a)(iv). DOR will not take into account any projected new state revenues where the projections are not supported by sufficient information or documentation.
The DOR will maintain confidentiality of all submitted financial information and trade secrets to the extent required by law. See G.L. c. 66, § 10 (concerning public inspection and copies of records), G.L. c. 4, § 7, cl. 26 (defining "public records"), and G.L. c. 62C, § 21 (prohibiting DOR disclosure of tax information in certain circumstances). Developers (and successor owners) must agree in writing to permit municipalities, A&F, and their agents, to have access to and rights to inspect all data submitted, for purposes of evaluating, reviewing, or monitoring proposed or approved projects. The Department may reasonably restrict the distribution of discrete tax information relating to individuals or individual business entities where such discrete information is unnecessary for review or analysis.
For final project approval, the annual new state tax revenues expected to be received by the Commonwealth from each occupied project component, or if the economic development project is a "phased project," as described in the A&F regulations, the phase of the project for which the developer is seeking approval, must be at least 1.5 times the projected annual debt service on the bonds allocable to such occupied project component from and after the date on which it is projected to become an occupied project component, but for the sole purpose of satisfying all or any portion of this coverage requirement in excess of 1 times coverage, the Secretary of A&F and the Commissioner shall count as new state tax revenues all or any portion of projected new state tax revenues to be realized in the related fiscal year or in previous fiscal years as a result of construction-related activity in connection with the economic development project once a project component is an occupied project component. Any such projected new state tax revenue from construction related activity shall be allocated among all occupied project components from construction-related activity over the fiscal year in which such activity occurred or any subsequent year or years proposed by the Developer on a pro rata basis based on the portion of the Bonds allocable to such occupied project component. See 801 CMR 51.03(2)(d). For other provisions regarding the allocation of projected new state tax revenues among assessment parcels, see 801 CMR 51.06(19). For purposes of this paragraph, construction-related activities that may be taken into account in determining new state tax revenues shall be limited to amounts allowed under St. 2006, c. 293, § 5, both those directly attributable to actual construction of the public infrastructure improvements identified in the economic development proposal, and also revenues directly attributable to other construction costs related to the economic development project. For example, taxes reasonably projected to be paid on wages earned by construction workers, or the construction worker employees of an independent contractor, are includable to the extent the wages are attributable to work on the economic development project. Reasonably projected sales or use taxes in Massachusetts on construction materials to be used in a project component may also be counted as expected annual new state tax revenues under this provision relating to allowable construction-related revenues. However, taxes attributable to attorneys assisting in developing the project plans, for example, or to accountants assisting in payroll or accounting activities, are ineligible for consideration as construction related activity.
Annual new state tax revenues include certain categories of taxes to be derived from a project, and generally exclude a subset of these revenues, known as dedicated revenues. The first category, under the personal income tax at G.L. c. 62, is "wages" as defined at G.L. c. 62B, § 1. These are items of income defined as "wages" under section 3401 of the Internal Revenue Code, periodic payments and nonperiodic distributions as defined in Code section 3405 and subject to federal withholding, and contributions paid by the employer on behalf of the employee pursuant to G.L. c. 32, § 22(10) or pursuant to G.L. c. 32, § 65D(i) and not otherwise included as wages. Also counted as annual new state tax revenue under the income tax are partners' distributive shares of earned income taxable as "Part B" income under G.L. c. 62, § 17. This includes all income except, generally, interest, dividends, and capital gains. Annual new state tax revenues may include payments to independent contractors that the developer can document are paid as wages to employees of the independent contractors and are derived from work on a project, or paid by the independent contractor as partners' distributive share of income attributable to a partner's work on a project. Allowable new state tax revenues do not include distributive share income of S corporation shareholders.
The second category of tax counted as annual new state tax revenue is sales taxes under G.L. c. 64H, § 2, except as provided below. As a general matter, this includes excises derived from sales of tangible personal property, including meals, automobiles (note that automobiles have a local excise that is not included in the Act), and cigarettes (cigarettes also have other taxes that are not included in this calculation). Excluded from the calculation are dedicated revenues, namely the 20% of sales tax revenue dedicated to the Massachusetts School Building Authority, and another 20% of revenue dedicated to the Massachusetts Bay Transportation Authority State and Local Contribution Fund. Annual new state tax revenues do not include revenue from miscellaneous excises, such as sales of gasoline (G.L. c. 64A) and other fuels (64E and F), nor do they include taxes on the sale of alcoholic beverages, taxable under G.L. c. 138. Annual new state tax revenues also include the revenue attributable to the room occupancy excise under G.L. c. 64G, § 3 and St. 1969, c. 546, § 22. (This is the tax on room rentals in a hotel, motel, lodging house, or bed and breakfast.) For projects located in convention center districts, all state tax revenues deposited into the convention center fund are excluded from annual new state tax revenues as dedicated revenue, except for sales tax revenues if and to the extent agreed to by the Massachusetts Convention Center Authority, A&F and the developer, as described in section II.3, below.
For each tax type, the amount of tax revenue lost as a result of any businesses displaced by the project must be netted out of the totals. In accordance with the A&F Regulations, A&F will hire an independent consultant (to be paid for by the developer) to evaluate a proposal and its economic impact, including displacement of jobs and commercial activity in each project component. DOR reserves the right to adopt, modify, or reject the analysis. Displacement shall include both displacement within a business (such as when a company transfers employment from one location to another) and displacement within the Massachusetts economy (such as when new business activity in one geographic area displaces existing businesses in another geographic area). The net number of new jobs for a project shall be calculated on an entity-by-entity basis and then totaled. For each company, the net number of new jobs shall be the lesser of the increase in the number of employees at the establishment on the project site or the increase in the number of employees from the same company statewide. For purposes of this section, "company" shall mean a business entity and shall include all related members, as that term is defined at G.L. c. 63, § 31I. The DOR shall have the authority to adjust new job estimates calculated by multi-affiliate companies or related entities if it concludes that such adjustments more accurately reflect net new jobs generated by the project.
The net number of new jobs and other taxable economic activity for a site shall by discounted by factors that take into account displacement within the Massachusetts economy. This shall include displacement of economic activity within the project area prior to the project's inception, which shall be subtracted from the amount of economic activity attributed to the project. The displacement shall be estimated by considering sales generated for export and to satisfy demand within Massachusetts ("local demand") for the specific industries located in the project area. Only that portion of the new industry output estimated to be produced for sale outside of Massachusetts or substituting for imports into the state shall be considered as net new output for the Commonwealth. DOR reserves the right to use an alternative method or methods of calculating displacement and/or net new revenue if it finds, based on its own analysis or that of the independent contractor, that such method or methods better account for the net economic impact of the project on the Massachusetts economy. In addition, the future projected revenues that would be lost from any displaced businesses must be adjusted for anticipated inflation, as specified by the DOR. For more information, see the A&F regulations, particularly the definition of "New Revenue" in 801 CMR 51.02.
Example
Prior to it's designation as a project site, businesses in a site area employ 100 full-time equivalent employees in a single site donut retail store. After completion, employment in the project area is 1,000 full-time equivalents, including 100 who are employed in a professional catering company, 200 who are employed in a brokerage operation, 200 who are employed in a law firm, 400 who are employed at a pharmaceutical manufacturing company, and 100 who are employed in retail establishments. Furthermore, the law firm has reduced its employment in Massachusetts outside the site by 100 full-time equivalent employees, and the pharmaceutical manufacturing company has transferred 100 full-time equivalent employees from another site within the Commonwealth. The donut store ceases operations and all its employees are laid off. The number of net new jobs is calculated as follows:
|
Jobs at Site After Project |
Transferred/Job Reductions |
Net New Jobs at Site |
Hypothetical Discount Factor |
Net New Jobs in MA |
|
|
Donut Store Jobs |
0 |
-100 |
-100 |
88.8% |
-11 |
|
Catering Company Jobs |
100 |
100 |
90.1% |
10 |
|
|
Brokerage Firm Jobs |
200 |
200 |
41.5% |
117 |
|
|
Law Firm Jobs |
200 |
-100 |
100 |
58.0% |
42 |
|
Pharmaceutical Manufacturing Jobs |
400 |
-100 |
300 |
21.7% |
235 |
|
Retail Establishment Jobs |
100 |
100 |
88.8% |
11 |
|
|
Total Jobs |
1,000 |
-300 |
700 |
N/A |
404 |
2. Specific data elements required for initial project approval
The data required for preliminary project approval are detailed at 801 CMR 51.06. The following categories of data are to be used in the DOR's review and preliminary certification. Note that only tax and revenue data related to tax types included in new state tax revenues with respect to the project are required.
a. Personal income tax data
Current number of jobs and the projected net number of new jobs in each business, as more fully described in 801 CMR 51.06(9);
Wage and other income data or estimates for these jobs, including expected wage information for employees and for partners' compensation derived from ordinary income for personal services (excluding capital gains). These data or estimates may be supplied in an aggregate form for each project component.
The estimated state tax revenues to be generated from construction activity related to the project, as allowed under section II.1, above.
b. Sales tax data
Allowable sales and use tax data for construction related activities as set forth in section II.1, above.
Current total sales and projected total sales by business type;
Current net taxable sales and projected net taxable sales;
Current sales taxes and projected sales taxes, less taxes that are dedicated revenues.
c. Room occupancy tax data
Current number of new hotel rooms and their occupancy rates and projected number of new hotel rooms and their occupancy rates;
Current room occupancy tax revenues and projected net room occupancy tax revenues, less dedicated revenues.
3. Special provisions for Convention Center Finance Districts
The estimates of new state tax revenue attributable to an economic development project within the Convention Center Finance District as defined in section 2 of chapter 152 of the acts of 1997 or within the Springfield Civic and Convention Center Finance District as defined in subsection (b1/2) of section 10 of chapter 152 shall include an amount of new revenue from the sales tax excises imposed by G.L. c. 64H, § 2 if the Massachusetts Convention Center Authority has entered into an agreement with a developer and the Secretary of A&F dedicating such excises deposited into the Convention Center Fund in such amount to support the economic development project in accordance with clause (vi) of subsection (c) of section 10 of chapter 152. DOR is responsible for determining and certifying to the Secretary of A&F the amount of such sales tax excises attributable to the economic development project that have been deposited into the Convention Center Fund in each fiscal year pursuant to subsection (b) or subsection (b1/2) of section 10 of said chapter 152 and, subject to subsection (c) of section 10 of said chapter 152, the amount of such receipts provided for pursuant to the agreement between the Convention Center Authority, the developer and the Secretary shall be transferred to the General Fund, but in no event shall the amount transferred exceed the new state tax revenue attributable to the related economic development project as calculated by the Commissioner for purposes of section 10.
III. Annual certification by the Department of Revenue
For as long as state infrastructure development assistance is provided, the Commissioner of Revenue shall determine and provide an annual certification to the Secretary of A&F and to the treasurer of the municipality the amount of new state tax revenues generated with respect to each project component of a certified project. As defined in the A&F Regulations, at section 2, the "Annual Certification of New State Tax Revenues" is the annual certificate the Commissioner is required to make to the Secretary and the Treasurer pursuant to section 10(a) of the Act regarding her determination of the new state tax revenues generated with respect to each occupied project component in the prior fiscal year of the Commonwealth, which annual certificate shall be issued in accordance with this regulation and the DOR guidance and shall clearly identify, for the prior fiscal year of the Commonwealth: the total state tax revenues generated from each occupied project component; the portion of such state tax revenues that constitutes new revenues from each occupied project component, including the annual data and displacement factors upon which such determination is based; the portion of any such new revenues that constitutes dedicated revenue from each occupied project component; the new state tax revenues generated from each occupied project component; the shortfall amount, if any, with respect to each occupied project component; the cumulative new state tax revenues with respect to each occupied project component for all prior fiscal years of the Commonwealth; the amount of accumulated surplus from prior years transferred to MDFA and not yet used or legally committed, in accordance with 801 CMR 51.02, "Shortfall," and a statement as to whether the cumulative new state tax revenues with respect to an occupied project component equal or exceed the net debt service on the bonds allocable to the occupied project component. For other requirements, see 801 CMR 51.17(e).
For each tax type, the amount of revenue lost as a result of businesses displaced by the project should be netted out of the totals, as well as any dedicated revenues. The projected revenues that would be lost from displaced businesses must be adjusted for inflation.
The following additional data where available shall be provided to DOR each year for each project. Note that only tax and revenue data related to tax types included in new state tax revenues with respect to the project are required.
The name and taxpayer ID number for each new tenant or owner in a project component;
As a general matter, DOR will require an aggregate figure showing the actual wages or other compensation attributable to each project component, excluding capital gains attributable to employees, partners, contractors, etc., working at the site. DOR reserves the right to perform an audit of all data submitted;
The net number of new jobs per business. Note: where new employees in the development project have been transferred from elsewhere in the Commonwealth, the party responsible for furnishing this information must demonstrate the extent to which there has been a net increase in jobs, and the extent to which state tax revenues have been derived from that net increase.
The total sales and net taxable sales for each relevant business.
The number of new hotel rooms, and their net room revenues.
The sales taxes and room occupancy taxes that have been generated, less dedicated revenues.
Where the DOR accepts a claim by the responsible party that the required data do not yet exist, or are not available, the DOR may agree to accept an alternative reporting mechanism using aggregate measures or other data.
The calculation of net new jobs and net new tax revenue shall be made using the method set out in the Example shown in Section II.1 of this TIR.
In calculating the amount of new state tax revenues generated with respect to each project component of a certified project for annual certification, the baseline from which to determine whether the project conforms to the terms of the original certification is the projections that were used in granting that certification. To the extent there are changes to the original circumstances such that they affect the method for calculating new state tax revenues, the developer and any subsequent owners must state these differences in furnishing the required annual data, and explain how the net revenues, despite the different circumstances, fulfill the statutory requirements. For example, if during the years that annual certification is required a tenant occupying a project component leaves, and another tenant conducting a different type of business enters, the method of calculating job displacement may change. Any such changes will be taken into account by the DOR in making its annual certification.
Prior to issuing its annual certification to the Secretary of A&F, the Commissioner will submit its draft findings to the developer (or subsequent owner) for review. The developer or subsequent owner will have 14 days from the date of DOR's issuance of the draft findings to offer comment. If the developer or subsequent owner disagrees with any part of the draft, it must give a specific and verifiable analysis that leads to its disagreement, and must state its alternate conclusions. The DOR will review these comments, and within 30 days of their receipt will notify the developer or subsequent owner whether the DOR accepts the comment, accepts the comment in part, or rejects the comment.
/s/Navjeet K. Bal
Navjeet K. Bal
Commissioner of Revenue
NKB:MTF:dt
June 19, 2009
TIR 09-10