Partner Tom Lloyd Addresses The New Idaho Reimbursement Incentive Act

23-Jul-2014

News reports of the Idaho Legislature’s 2014 session were dominated by the protests and arrests of advocates supporting additional prohibitions on sexual orientation and gender identity discrimination in employment and housing. The controversial “Add the Words” campaign did not result in legislative changes despite the group’s contention that additional protections would attract economic growth, businesses, and qualified employees.

Although the legislature did not “Add the Words” in 2014, it did pass the Idaho Reimbursement Incentive Act (IRIA) to stimulate economic growth and job creation. In a nutshell, the IRIA, which was passed over the votes of only six senators and seven representatives, will provide tax credits for employers that create new full-time jobs in Idaho. Because the IRIA did not garner as much attention as the “Add the Words” campaign, this article highlights some of the Act’s features and requirements for employers hoping to take advantage of the tax credit, which became available on July 1.

Incentive credit eligibility

According to the IRIA’s Legislative Statement of Purpose, the Act is “a new performance-based economic development tool that provides a tax credit up to 30% for up to 15 years on new corporate income tax, sales tax, and payroll taxes.” In other words, while the IRIA will not affect employers’ existing taxes, it provides for a potential credit against some of the new taxes a company would have as a result of expanding. The problem is, the IRIA’s drafters created a complex set of standards employers must meet before they are eligible for the tax credit. By implementing those standards, the legislature didn’t exactly make it easy for employers to qualify for the tax credit.

The most obvious question is, who qualifies for the tax credit? The short answer: The legislature designed the IRIA to encompass both new and existing employers that demonstrate they will create new jobs in Idaho. The Act does not differentiate between employers that already have a presence in the state and those that do not.

First, an employer must demonstrate that it will create a certain number of new jobs in the state. Therefore, a qualifying plan requires the creation of a new business or the expansion of an existing business that already has a presence in Idaho. In rural locations (i.e., a city with a population of fewer than 25,000 or an unincorporated area within a county), employers must create at least 20 new jobs. In urban communities (i.e., a city with a population of at least 25,000), employers must create 50 new jobs. There is one exception to those guidelines: A city that has a population of fewer than 25,000 and adjoins a larger city is considered part of an urban community under the Act. For example, Ammon, which has a population of

roughly 14,000, is considered an urban community because it adjoins Idaho Falls, which has a population of approximately 58,000.

Additionally, qualifying jobs must be new, nonseasonal,full-time positions. Importantly, an employer must be able to demonstrate that it has actually created new jobs, and not merely reorganized pre-existing positions in the company. For existing employers expanding operations in Idaho, that means that the total number of company jobs with the addition of the project must exceed the total number of company jobs from the 12 months preceding the launch of the project, by the required number of 20 jobs in rural areas and 50 jobs in urban areas. A company will therefore not qualify for the tax credit if it simply skews its numbers by relocating jobs from one location to another.

Finally, new jobs must pay wages that equal or exceed the average annual wage for the county in which the jobs are located. Thus, employers must examine the demographics of the county in which the new jobs will be located. According to the Idaho Department of Labor (IDOL), average annual wages can vary greatly by county. For example, in sparsely populated Lemhi County, the average annual wage barely exceeded $29,000 in 2013, while the average worker in Boise earned about $43,000. The IDOL maintains wage statistics for each county in Idaho.

Application process

Clearly, the IRIA was not designed with all employers in mind. It was crafted to allow only a limited number of employers to obtain the tax credit. If an employer meets the Act’s stringent requirements, it can put together an application for the Idaho Department of Commerce (IDC). If the IRIA’s eligibility requirements do not discourage employers from seeking the tax credit, the application process prescribed by the legislature might. Employers seeking the tax credit must submit a detailed application describing:
• The new project;
• The nature of the jobs that will be created;
• The wages that will be paid;
• The estimated economic impact on the state (including
tax revenue);
• Which Idaho goods and services will be used by the
project;
• The schedule for completing the project;
• Proposed performance requirements to be met before
the tax credit will be issued; and

• The necessary capital investment for the project.

Most employers will have to retain a number of professionals (e.g., accountants and lawyers) to provide the details required by the IRIA. It appears the legislature did not have an eye toward small and medium-sized businesses that operate on a tight budget when it drafted the Act.

The IRIA’s requirement that employers obtain and provide proof of a “community match” before applying for the tax credit is perhaps the most significant aspect of the application process. To qualify, employers are required to (1) engage the local government in the community where the jobs will be located, (2) obtain a letter of committed support from the community’s elected officials, and (3) provide evidence of active support for the project. Active support may include monetary contributions, waivers of fees, in-kind services, the provision of infrastructure support, or a combination of those items.

Employers are entitled to the tax credit only if they show that the IRIA’s criteria have been met to a satisfactory degree, subject to a vote by the IDC’s economic advisory council.

Final agreement and reimbursement

Once an employer is approved, the employer and the IDC will negotiate and enter into a tax reimbursement program. The employer will pay all applicable taxes up front and be reimbursed by the state based on a percentage of all paid corporate income, payroll, and sales taxes. The terms of the agreement must include how long the reimbursement program will last (up to 15 years), a detailed description of the employer’s plan for keeping all records required of the employer under the IRIA, measurements to show the project’s progress, methods of establishing compliance with the agreement, the consequences of the employer’s failure to abide by the agreement, and other pertinent information. Finally, the IRIA requires annual reporting by employers and the IDC.

Bottom line

Obtaining the IRIA’s tax credit is no small task. To be entitled to the tax credit and reimbursement, an employer must do a significant amount of work, likely at significant expense. With up to (but no guarantee of) a 30 percent tax credit, it remains to be seen whether the process will pay for itself or how long repayment will take.

In reality, for most employers, the IRIA is overly complex and prohibitively costly. Employers seeking to take advantage of the tax credit are encouraged to carefully review the IRIA from start to finish and seek advice when drafting required expansion plans to ensure compliance with the Act.

Don’t expect the IRIA to have a significant impact throughout the state. However, the Act shows that the Idaho Legislature is capable of coming together to pass legislation designed to create jobs and stimulate the economy.