kentucky reform mania: first economic development… · kentucky reform mania: first economic...

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KENTUCKY REFORM MANIA: FIRST ECONOMIC

DEVELOPMENT, NOW TAXES

CLE Credit: 1.0 Wednesday, June 6, 2012

10:45 a.m. - 11:45 a.m. Carroll-Ford Room Galt House Hotel

Louisville, Kentucky

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A NOTE CONCERNING THE PROGRAM MATERIALS

The materials included in this Kentucky Bar Association Continuing Legal Education handbook are intended to provide current and accurate information about the subject matter covered. No representation or warranty is made concerning the application of the legal or other principles discussed by the instructors to any specific fact situation, nor is any prediction made concerning how any particular judge or jury will interpret or apply such principles. The proper interpretation or application of the principles discussed is a matter for the considered judgment of the individual legal practitioner. The faculty and staff of this Kentucky Bar Association CLE program disclaim liability therefore. Attorneys using these materials, or information otherwise conveyed during the program, in dealing with a specific legal matter have a duty to research original and current sources of authority.

Printed by: Kanet Pol & Bridges 7107 Shona Drive

Cincinnati, Ohio 45237

Kentucky Bar Association

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TABLE OF CONTENTS The Presenters ................................................................................................................. i Incentives for the New Kentucky (INK) House Bill 3 ........................................................ 1 11 RS SB 1/GA ............................................................................................................... 9 Tax Reform Commission Meeting Materials .................................................................. 17

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THE PRESENTERS

Jennifer Yue Barber Bingham Greenebaum Doll, LLP

3500 National City Tower 101 South Fifth Street

Louisville, Kentucky 40202 (502) 587-3576

JENNIFER YUE BARBER is a member of Bingham Greenebaum Doll’s Tax and Finance Practice Group. She concentrates her practice in state and local tax matters, including tax controversy/litigation, economic development/incentives and governmental affairs. Ms. Barber received her bachelor’s and law degrees from the University of Kentucky. She was recently appointed to serve on the Louisville Bar Association’s Board of Directors and serves as Chair-Elect for the Kentucky Bar Association’s Tax Section. She is also actively involved with the Kentucky Chamber of Commerce. Ms. Barber is a 2011 recipient of the Business First of Louisville Forty Under 40 Award, one of the youngest ever to be so honored. Daryl W. Snyder Greater Louisville, Inc. The Metro Chamber of Commerce 614 West Main Street, Suite 6000 Louisville, Kentucky 40202 (502) 625-0000 DARYL W. SNYDER serves as Vice President for Economic Development of Greater Louisville, Inc. and has spent more than twenty years working with companies and consultants in corporate site selection. Mr. Snyder received his B.S. from Georgetown College and is a graduate of the U.S. Chamber of Commerce Institute for Organization Management at UCLA. He is also a 2003 graduate of Leadership Louisville and was a Bingham Fellow in 2011. Mr. Snyder serves on the Board of Directors of the World Trade Center of Kentucky and the Louisville Regional Airport Authority Project Team. He is the 1998 recipient of the Landmarks of Excellence Award from the PRSA/IABC.

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Mark F. Sommer Bingham Greenebaum Doll, LLP

3500 National City Tower 1010 South Fifth Street

Louisville, Kentucky 40202 (502) 587-3570

MARK F. SOMMER is a Partner at Bingham Greenebaum Doll, LLP and tax attorney resident in the Louisville office where he serves as chair of the Tax and Finance Practice Group. His practice focuses on controversy, litigation and planning relating to state and local tax matters. Mr. Sommer has written extensively in the area of state and local taxation and is a frequent speaker and lecturer on state and local tax matters. Mr. Sommer recently served as Chair of the SEATA Industry Council and also recently served as Director and Vice Chair of the Kentucky Lottery Corporation. He received his J.D. from the University of Cincinnati College of Law and his B.S.B.A. from Xavier University. Mr. Sommer is a Fellow in the American College of Tax Counsel, one of only four in the Commonwealth of Kentucky. John V. Wharton Toyota Motor Manufacturing of North America, Inc. Legal NA 25 Atlantic Avenue Erlanger, Kentucky 41018 (859) 746-4027 JOHN V. WHARTON serves as Assistant General Counsel to Toyota Motor Engineering and Manufacturing North America, Inc. Prior to joining Toyota, he was Partner/Member with Greenebaum Doll & McDonald, PLLC. Mr. Wharton received his B.A. from Vanderbilt University and his J.D. from the University of Kentucky College of Law, where he served as Comments Editor for the Kentucky Law Journal. He is admitted to practice before the United States District Court for the Eastern District of Kentucky and the Supreme Court of Kentucky. Mr. Wharton serves on the Board of Trustees for Artswave and Cincinnati Playhouse in the Park. He is the recipient of the 2008 Northern Kentucky Action Council of the United Way’s Gary R. Bricking Community Leadership Award.

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Senator David L. Williams Post Office Box 666

Burkesville, Kentucky 42717-0666 (270) 864-5636

SENATOR DAVID L. WILLIAMS serves as Senate President and represents the 16th District in the Legislature. Senator Williams serves as Chair of the Senate Committee on Committees and Rules Committee. He also serves as Co-Chair of the Legislative Research Commission. Senator Williams is a graduate of the University of Kentucky and received his J.D. from the Brandeis School of Law at the University of Louisville. He serves as Chair of the Council of State Governments and serves on the Executive Committee of both the Senate Presidents Forum and the National Conference of State Legislatures. Senator Williams was named the “Republican Legislative Leader of the Year” by the National Republican Legislators Association and “Legislator of the Year” by the American Legislative Exchange Council.

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INCENTIVES FOR THE NEW KENTUCKY (INK) HOUSE BILL 3

This summary provides a broad overview of the programs administered by the Cabinet for Economic Development in HB 3 and a comparison to previous programs where relevant. This document is not, nor is it intended to be, a complete and exhaustive summary of the changes made or new programs enacted and does not include all programs from HB 3.

REINVESTMENT IN MANUFACTURING FACILITIES

Amendments to provisions relating to the reinvestment in Manufacturing Facilities (Subchapter 34 of KRS Chapter 154)

Prior Program HB 3 Program

Qualifying Companies

Automobile – related manufacturing companies

All manufacturing entities

Eligible Costs Costs of new equipment and the construction of facilities and amenities to support the new equipment

Costs of new equipment and the construction of facilities and amenities to support the new equipment Costs of skills upgrade training programs

Limitations on Recovery

Up to 10% of eligible costs � up to 100% of eligible skills upgrade training costs

� Up to 50% of eligible equipment and related costs

Requirements for recovery

� At least 1,000 employees � Eligible costs of at least

$100,000,000 � Reasonable period in Kentucky

� Eligible expenditures of at least $2,500,000

� Agree to maintain a full-time employment base, negotiated by CED, but no less than 85% of the number of full-time employees

� Not have received incentives under Subchapter 26 (KIRA) in the past five years

Incentives Available

� Income/LLET tax incentives during the term of the agreement of up to 100% of the liability

� License tax credits (the license tax has been repealed)

� Income/LLET tax incentives during the term of the agreement of up to 100% of the liability

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Term of the Agreement

Up to ten years or when receive inducements equal to approved costs

Up to ten years or when receive inducements equal to approved cost. No final approvals shall be granted prior to June 30, 2010.

NEW COMBINED CREDIT PROGRAM

This program is designed to replace KREDA (KRS 154.22), KEOZ (KRS 154.23), KJDA (KRS 154.24), and KIDA (KRS 154.28). Companies receiving preliminary or final approval prior to June 26, 2009 are under the prior program. After June 26, 2009 HB 3 is applicable. Prior Programs HB 3 Program


KREDA – New and expanding manufacturing facilities in designated counties KJDA – New and expanding service or technology related projects that provide 75% of services to persons located outside the state or corporate headquarters KIDA – New and expanding manufacturing facilities KEOZ – Focuses on the development of areas with high unemployment and poverty levels – a zone is certified and is limited to one per county. Once the zone is certified, eligible manufacturing or service/technology companies can apply for incentives.

Companies involved in manufacturing, agribusiness, nonretail service or technology, or national or regional headquarters operations regardless of the underlying business activity of the company. “Service or technology” activities are those provided predominately outside the Commonwealth and designed to serve a multi-state, national or international market.

Eligible Costs KREDA – Land, buildings, site development, fixtures and equipment KJDA – Start up costs for furnishing and equipping the facility and rent costs KIDA – Land, buildings, site development, fixtures and equipment, although equipment is limited to $20,000 for each new job created and maintained KEOZ – Manufacturing companies may recover costs of land, buildings, fixtures and equipment. Service and technology companies may recover up to 50% of start up costs limited to $20,000 per new full time job, of which $10,000 can be recovered and up to 50% of annualized rent.

� For owned projects: Start up costs and costs for land, buildings, site development, fixtures and equipment

� For leased projects: Start up costs and 50% of estimated annual rent during the term of the agreement

In non-enhanced counties, cost of equipment eligible for recovery shall not exceed $20,000 for each new full time job created

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(For all programs maximum recoverable is negotiated and subject to KEDFA approval) KREDA – recovery of up to 100% of capital investment KJDA – Recovery up to 50% of project start up costs and 50% of annual rental cost or rental value. Start up costs are limited to $20,000 per new full time job for Kentucky residents subject to Ky. tax, of which a maximum of $10,000 per job may be recovered) KIDA – recovery of up to 100% of capital investment except equipment, which is limited to $20,000 for each new job created and maintained KEOZ – Manufacturing up to 100% of investment, service/technology 50% of start-up costs limited to $10,000 per new full time job and 50% of rent

Up to 100% of eligible costs except leased projects are limited to 50% of rental costs over the term of the agreement and equipment costs in non-enhanced counties are limited to $20,000 for each new full time job created. KEDFA negotiates approved cost which is maximum recoverable.


KREDA – fifteen new jobs for Kentucky residents, capital investment of $100,000, minimum compensation is as follows: Within six months of the activation date, 90% of new full-time employees shall be paid either 75% of the average hourly wage for the Commonwealth or 75% of the average hourly wage for the county where the project is located, or 150% of the federal minimum wage, whichever is greater, plus benefits equal to at least 15% of base wages, with some exceptions KJDA – fifteen new full time jobs for Kentucky Residents, same wage requirements as KREDA KIDA – fifteen new full time jobs for persons subject to Kentucky income tax, minimum investment of $100,000, same wage requirements as KREDA KEOZ – ten new full time jobs for qualified employees (subject to KY tax and residing in the zone for at least twelve months), minimum investment of $100,000, same wage requirements as KREDA

� Create at least ten new full time jobs and maintain an average of at least ten new full time jobs

� Incur eligible costs of at least $100,000

� Pay at least 90% of all new full time employees at least 125% of the federal minimum wage (FMW) throughout the term of the agreement in enhanced incentive counties, plus 15% benefits, and 150% of the FMW throughout the term of the agreement in non-enhanced incentive counties, plus 15% benefits

� If, on any annual monitoring date a company falls below ten jobs or the 150% or 125% minimum wage requirement, incentives will be suspended or possibly terminated

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KREDA – Income tax credit and wage assessments of 4% KJDA – Income tax credit and wage assessments of up to 5%, varying based upon local participation KIDA – Income tax credit OR wage assessment of up to 3% KEOZ – Income tax credit and wage assessment of up to 5% with 4% from state and 1% from local

� Income tax/LLET credit � Wage assessment – up

to 5% state participation in enhanced incentive counties; up to 4% in other counties, varying based upon local participation (up to 3% state + county contribution)

� Advance disbursement for projects over $500,000,000 (not funded at this time and subject to approval by the General Assembly)


KREDA – fifteen years KJDA – ten years KIDA – ten years KEOZ – ten years

Fifteen years in enhanced incentive counties Ten years in others

Other Requirements

KREDA and KIDA – Can recover under an operating lease of at least the term of the agreement but recovery is limited to cost of purchase and installation of equipment which cannot exceed $20,000 per new job created – taken through wage assessment only KJDA – Requires local community approval KEOZ – Companies must show that no significant number of existing jobs within the Commonwealth will be lost or adversely affected and requires certification that project would locate outside the zone if not for incentives

Job and wage targets higher than the minimum requirements will be negotiated. A company that reaches 90% of both targets at activation and annual review shall retain full incentives. A company that achieves less than 90% in either or both shall have incentives reduced in that year in the same proportion that the targets are missed KREDA qualification provisions have been retained and replacement language from existing statutes has been retained but KREDA counties are now called enhanced counties. See enhanced benefits throughout chart above.

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EDUCATIONAL REIMBURSEMENT Grandfather Tax Incentive for current participants in the Metropolitan College

Consortium


Companies that are a party to the Metropolitan College Consortium

Eligible Costs 50% of actual costs incurred for tuition paid to an educational institution and other educational expenses


Limited to tuition and expenses paid for 2,800 employees each year

Requirements for Recovery

Only requirement is that the expenditures be paid, and that documentation be provided supporting the expenditures


Income tax credit to be administered through Bluegrass State Skills Corporation

Term of the Program

Five year sunset provision, unless extended by the General Assembly

KENTUCKY ENTERPRISE INITIATIVE ACT

Moves essentially what were the provisions of the Kentucky Enterprise Initiative Act (KRS 154.20-200 to 154.20-216) to its own subchapter and expands the expenditures that qualify for the research and development cap to electronic processing equipment. (Note all provisions in KRS 154.20-200 to 154.20-216 relating to preference zones, which were the former enterprise zones have been deleted as those provisions have expired)

Old Provisions New Provisions

Credit Cap $20 million for building and construction materials $5 million for equipment used for research and development

Same as current law except the $5 million cap also includes expenditures for electronic processing equipment


Companies primarily engaged in manufacturing or service or technology activities or in operating or developing a tourism attraction

Same as current law

Eligible Costs Sales and use taxes paid on the purchase of building and construction materials or equipment used for research and development for a new or expanded facility

Same as current law except the sales tax paid on the purchase of electronic processing equipment is also included


Sales tax made on qualifying expenditures

Same as current law


Minimum investment of $500,000 – minimum investment includes the cost of land but not the cost of labor

Same as current law except to recover the sales tax paid on data processing equipment, the eligible company shall spend an aggregate amount of $50,000 in addition to meeting the minimum investment requirements.

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Sales tax paid on qualifying purchases

Same as current law


Approved companies had eighteen months to make expenditures – the eighteen months could be extended for up to twelve months

Term negotiated up to seven years. If term is longer than three years annual reporting is required

NEW PROGRAM Sales Tax Incentive for the purchase of communications systems or computer

systems Qualifying Companies

Companies in the following NAICS categories: Software publishers; data processing, hosting, and related services; internet publishing, broadcasting, and web search portal businesses; or custom computer programming services

Recovery Sales and use taxes paid on qualifying purchases Requirements for recovery

� Expenditure of at least $100,000,000 or more � Installation of the qualifying system at a single location within the

Commonwealth within eighteen months of purchase � System must be used at the location for the full period of

depreciation under the Internal Revenue Code � System must be used for the business purposes listed under

“companies that qualify” Incentives Available

Sales and use tax refund

Application Process

Preliminary approval by the Department of Revenue, with submission of an application upon completion of the purchases for which the refund is being sought. This program is not a CED or KEDFA-administered program.

Other requirements

If the system is not operated as required for the requisite amount of time or in the required manner, the company must repay the sales and use tax refunded

NEW PROGRAM Small Business Development Credit Program

Note: The statute requires that KEDFA develop this program and not all program parameters have been finalized Qualifying Companies

Small businesses meeting the definition of KRS 154.12-325: "Small business" means any business entity organized for profit, including a sole proprietorship, partnership, limited partnership, corporation, limited liability company, joint venture, association, or cooperative, that has fifty (50) or fewer full-time employees at the time it applies for a loan under KRS 154.12-330 and is not an affiliate or subsidiary of a larger corporate structure, unless the total number of employees of all the affiliates and subsidiaries within that structure is fifty (50) or fewer.

Recovery Income/LLET tax credit during the year approved by KEDFA; may be carried forward for five years

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� Expenditure of at least $5,000 or more on qualifying equipment or technology.

� Must create and fill one eligible position over a base employment level.

� New position must be in place for at least twelve months, be full time, and pay a base hourly wage of no less than 150% of federal minimum wage.

� Base year for calculating new employment is the later of the first full year of operation of a small business or the year that begins on or after 1/1/2010, and before 1/1/2011.


Maximum $25,000 credit for each year for each small business approved

Application Process

Authority to determine the terms, conditions and requirements for application for the credit, in consultation with the Division of Small Business Services. Still in development stages.

Other requirements

Program is capped at $3,000,000 in total credits that may be committed in each fiscal year. KEDFA must establish program procedures and standards by promulgating administrative regulations. Credit not applied until taxable year after 12/31/2011.

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11 RS SB1/GA 11 REG. SESS.

Unofficial Copy as of 5/11/12 AN ACT relating to fiscal policy, making an appropriation therefor, and declaring an

emergency.

Be it enacted by the General Assembly of the Commonwealth of Kentucky:

�Section 1. As used in this Act, "council" means the Kentucky Council on

Revenue Reform established by Section 3 of this Act;

�Section 2. The General Assembly of the Commonwealth of Kentucky finds

and declares that:

(1) It has been many years since the last comprehensive revision of

Kentucky's state and local tax and revenue system;

(2) To meet the needs of the citizens of the Commonwealth, the state and

local tax system should:

(a) Promote job creation, enhanced production capacity, and prosperity;

(b) Provide adequate revenues;

(c) Be efficient;

(d) Be equitable;

(e) Be predictable;

(f) Be sustainable;

(g) Allow the Commonwealth to compete economically; and

(h) Make the Commonwealth a low-taxed state;

(3) A comprehensive examination of the state and local tax system must

encompass state and local revenues, as well as economic development incentives

offered at both the state and local level;

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(4) Because the Commonwealth is facing difficult fiscal times, there is a need

for a complete review and revision of the existing revenue system; and

(5) Examination and revision of the state and local tax system and

development of proposed legislation will be best accomplished by the creation of the

council established by Section 3 of this Act, and the legislative process established by

Section 4 of this Act.

�Section 3. (1) There is hereby established the Kentucky Council on

Revenue Reform, which shall include the following members:

(a) Five economists, to be appointed by the Legislative Research

Commission, provided that all appointed economists shall be employed by an accredited

four-year college or university in the Commonwealth, at least one of the appointed

economists shall be employed by a regional public university, and at least one of the

appointed economists shall be employed by a private college or university;

(b) Two representatives from the Kentucky Society of Certified Public

Accountants, to be appointed by that body;

(c) One Property Valuation Administrator, to be appointed by the Kentucky

Property Valuation Administrators Association;

(d) A member of the Section of Taxation of the Kentucky Bar Association to

be appointed by the taxation section of the Kentucky Bar Association; and

(e) The following nonvoting members:

1. The commissioner of the Department of Revenue;

2. The deputy director for financial analysis of the Governor's Office for

Economic Analysis within the Office of State Budget Director; and

3. The chairpersons of the Interim Joint Committee on Appropriations and

Revenue.

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(2) The Kentucky Society of Certified Public Accountants, the Kentucky

Property Valuation Administrators Association, and the Section of Taxation of the

Kentucky Bar Association shall notify the President of the Senate and the Speaker of the

House of their appointments to the council within 15 days of the effective date of this Act.

(3) The President of the Senate and Speaker of the House shall establish a

first meeting date for the council, which shall be within 30 days of the effective date of

this Act, and shall ensure that a notice of the meeting and a copy of this Act is sent to all

council members at least ten days prior to the meeting.

(4) The council shall elect at its initial meeting, by majority vote, a voting

member to serve as chairperson. The chairperson shall be the presiding officer of the

council, and shall coordinate the functions and activities of the council with the

assistance of staff provided by the Legislative Research Commission.

(5) Council members shall not be compensated for serving, but shall be

reimbursed for ordinary travel expenses, including meals and lodging incurred in the

performance of their duties. These expenses shall be paid by the Legislative Research

Commission.

(6) The council may contract with independent consultants or advisors as

necessary to assist in meeting the directives of this Act. Any consultant or advisor

engaged by the council shall possess an academic background or substantial career

experience in one or more relevant fields, including economics, government budgeting

and administration, economic development, economic forecasting, state and local public

finance, or business. Costs associated with contracts for consultants and advisors shall

be paid by the Legislative Research Commission.

(7) A majority of the voting membership of the council shall constitute a

quorum.

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(8) Notwithstanding any other statutory provisions, all departments and

agencies of the Commonwealth shall, upon request of the council, provide requested

services, information, and staff support for the council, and all local governmental

entities shall provide information requested by the council. The council shall have access

to any requested information, including information that is required by law to be

confidential, other than information protected pursuant to an agreement with the federal

government. While the council and its staff may share summary analysis and research

resulting from confidential information and data provided pursuant to this Act, any

unsummarized confidential data and information that could identify an individual

taxpayer or company shall not be divulged, released, or otherwise shared in any way by

the council or its staff. Members of the council and its staff shall be subject to the same

confidentiality requirements as the providing agency or entity, and shall be subject to the

same penalties for violating confidentiality provisions, including penalties for improper

browsing or dissemination of information.

(9) The duties and responsibilities of the council are set forth in Section 4 of

this Act.

(10) Members who cease to serve on the council shall be replaced in the

same manner as the initial appointment was made.

�Section 4. (1) The council shall:

(a) Develop criteria for assessing the effectiveness of the current state and

local tax and revenue system, as well as the systemic impact of any proposed changes

affecting revenues. The criteria, at a minimum, shall:

1. Focus on the creation of jobs and enhancement of production capacity;

2. Examine the tax and revenue structure based on its adequacy, equity,

sustainability, predictability, and efficiency;

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3. Focus on the impact of the tax and revenue structure on the

competitiveness of the Commonwealth and our ability to attract businesses and

individuals to locate, live, work, and invest in the Commonwealth; and

4. Place an emphasis on making the Commonwealth a low-taxed state;

(b) Use the criteria developed to examine and analyze the existing state and

local tax and revenue system, including state and local tax revenues, other state and

local revenue sources, and economic development incentives offered by the state and

local governments;

(c) Seek and consider the input, advice, and comments, including public

testimony, written comments, or both, from parties interested in the state and local tax

and revenue system, including but not limited to the following:

1. The Kentucky Association of Counties;

2. The Kentucky Association of Manufacturers;

3. The Kentucky Chamber of Commerce;

4. The Kentucky Farm Bureau;

5. The Kentucky League of Cities;

6. The Kentucky Retail Federation; and

7. The National Federation of Independent Business; and

(d) On or before November 30, 2011, prepare and deliver to the Legislative

Research Commission:

1. Proposed legislation for a comprehensive revision of the state and local

revenue statutes, the economic development incentive statutes, and any other statutes

identified by the council as in need of amendment; and

2. A comprehensive report of the examination and analysis of the existing

state and local revenue system.

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(2) (a) Upon receipt of the proposed legislation and report from the

council, the Legislative Research Commission shall cause the proposed legislation to be

prepared for introduction during the 2012 Regular Session of the General Assembly.

(b) The Speaker of the House shall cause to be introduced in the House of

Representatives during the 2012 Regular Session of the General Assembly the

proposed legislation submitted by the council. If the Speaker of the House fails to have

the proposed legislation introduced, the minority floor leader of the House of

Representatives shall cause it to be introduced.

(c) The legislation shall be referred to the House Appropriations and

Revenue Committee for consideration. Upon a report from the committee that the

legislation shall pass as presented, the legislation shall be referred to the House of

Representatives and shall be considered as provided by the normal rules of the House

of Representatives, except:

1. Only technical amendments which do not amend the substance of the

legislation shall be permitted in the Appropriations and Revenue Committee and on the

floor of the House of Representatives; and

2. The legislation shall not be referred to any other committee of the House

of Representatives.

(d) Upon passage by the House of Representatives, the legislation shall be

reported to the Senate and referred to the Senate Appropriations and Revenue

committee for consideration. Upon a report from the committee that the legislation shall

pass as presented, the legislation shall be considered as provided by the normal rules of

the Senate, except:

1. Only technical amendments which do not amend the substance of the

legislation shall be permitted in the Appropriations and Revenue Committee and on the

floor of the Senate; and

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2. The legislation shall not be referred to any other committee of the Senate.

�Section 5. The council shall cease to exist upon the adjournment sine die of

the 2012 Regular Session of the General Assembly.

�Section 6. Whereas it is important for the Commonwealth to provide

adequate revenues to support government programs and services, an emergency is

declared to exist, and this Act takes effect upon its passage and approval by the

Governor or upon its otherwise becoming a law.

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