United States: Important Economic Development Tax Incentives Set To Take Effect!

Although sometimes overlooked, South Carolina has a host of economic development tax incentives which are available to many high tech companies which are locating or expanding in this state. In addition, as a result of the passage of the high tech legislation outlined below, a new set of incentives written specifically for certain high tech companies becomes effective in July.

The High Tech legislation was a joint effort of the Governor’s Office, the Department of Commerce, headed by Charlie Way, and the Republican leadership, headed by Lt. Gov. Bob Peeler and Ways & Means Chairman Bobby Harrell. It has two main sections. As stated below, it broadens the types of businesses which qualify for tax incentives, and it makes important changes to our research and development tax credits.

Under current law, the state provides a Jobs Tax Credit for certain qualifying businesses such as "manufacturers" and "processors" that create at least 10 new jobs. Many High Tech employers, particularly those in the software industry, are considered to be providing services and consequently do not meet the classic definition of "manufacturer." The bill accordingly adds "qualifying technology intensive facilities" (as defined below) to the list of businesses that are eligible for the lucrative job tax credit and job development credit.

The bill’s definition of qualifying facilities utilizes the North American Industrial Classification System, NAICS Code. (NAICS is the industrial code classification which replaced the traditional SIC Code.) Included under the new NAICS definitions are database and directory publishers; computer systems design; custom computer programming and systems design services; scientific research and development services; as well as space research and technology. The bill also amends the retraining credit to include employees of such employers.

Other types of businesses which qualify for the credit include manufacturing, processing, research and development and corporate headquarters. The employer must create and maintain at least ten new full time employees within one year. The dollar amount of the credit depends on which county the jobs are in. Each year the South Carolina Department of Revenue ranks all of the counties in the state as being Least Developed, Under Developed, Moderately Developed, or Developed based on unemployment rates and per capita income. Least Developed counties, such as Fairfield County qualify for a $4,500 credit per new job created each year for five years. For example, if twelve new jobs are created (and maintained) by an employer in Fairfield County within one year, that employer would be allowed a $54,000 credit each year for five years for a total five-year credit of $270,000. There are currently 21 Least Developed counties in South Carolina. Lexington County is a Moderately Developed county which means that its new jobs carry a $2,500 per year tax credit. Richland County is a Developed county and its new jobs carry a $1,500 per year tax credit.

The credit is allowed in reduce up to one-half of the employer’s South Carolina income taxes. It may offset corporate income taxes as well as individual income taxes and any unused credits may be carried forward for up to 15 years. Furthermore, if the employer is a pass-through entity such as a partnership or Subchapter S corporation, the credits will flow through to the owners of such entity.

The Job Development Credit is a very lucrative withholdings tax liability credit. (The amount of the credit depends upon the number of employees, the wage scale, and the county in which the jobs are located.) In order to be eligible to apply for the credit, the business (1) must qualify for the Job Tax Credit (see above); (2) provide a benefits package, including health care, to full time employees; and (3) be approved by the Coordinating Council for Economic Development. The Coordinating Council uses its discretion in reviewing each application, and will examine such factors as how the employer’s pay scale compares to the County average. The Council will also consider the number of new jobs and the capital investment commitments made by the employer in its application.

The employer must expend the credit on certain qualifying expenditures, such as acquiring or improving real estate, pollution control equipment, and training facilities. The High Tech bill also adds employee relocation expenses for such employers to the list of qualified expenditures under the current Job Development Credit. This will allow the High Tech employers to use the Job Development Credit to defray the cost of relocating certain critical employees under appropriate circumstances to South Carolina.

As stated below, the Bill also creates an income tax research and development credit and broadens the existing sales and property tax R&D credits.

The income tax credit provision provides for a credit against a business’s corporate income tax equal to 5% of the business’s qualified expenditures for research and development in South Carolina. "Qualified research and development expenditures" are defined to have the same meaning as contained in the federal Income Tax Code. This section of the bill also contains a provision limiting the credit to 50% of a business’s remaining tax liability after other credits are applied.

The bill also creates a sales and use tax exemption in lieu of the current $300 cap for machines used in research and development. This provision allows a complete exemption similar to what is currently provided for purchases of qualifying machinery by manufacturers. It also effectively repeals the requirement that research and development activities must be conducted in a separate facility. Lastly, it eliminates the requirement that such M&E must be used "exclusively" for research and development purposes, so long as it is used "primarily" for research and development. (This conforms with the federal definition.)

With reference to property taxes, currently, South Carolina provides a 5-year exemption from county property taxes (the exemption does not apply to school or municipal taxes) for the facilities of all new enterprises and additions valued at $50,000 or more to existing facilities of enterprises that are engaged in research and development activities. This section eliminates the "separate facility" requirement and similarly eliminates the "exclusive" use requirement.