United States: Arizona Enacts Credit Modifications For Business Expansion And Relocation

Arizona Governor Doug Ducey recently signed legislation which modifies and expands two credits available to businesses expanding in or relocating to Arizona.1 Specifically, the Qualified Facility Tax Credit (QFTC) has been extended through 2022 and the Data Center Tax Relief Program has been expanded. Both incentive programs are administered and negotiated with the Arizona Commerce Authority (ACA).

Adjustments to QFTC

In 2012, the Arizona legislature created the QFTC in order to attract and maintain businesses within the state.2 The QFTC is a refundable credit awarded to qualifying businesses expanding or locating a qualified facility within Arizona.3 Qualified facilities generally include headquarters, manufacturing, or research facilities, and qualifying investments include investments made in land, buildings, machinery, and equipment and fixtures.4 The amount of credit awarded is based upon negotiations with the ACA and varies based on the amount of capital investment and the number of jobs created.5 The new legislation extends the expiration of the QFTC an additional three years, so that QFTC qualification is not available for tax years beginning from and after December 31, 2022 (previously December 31, 2019).6

Notably, the legislation also made several other modifications to the QFTC to make qualification somewhat easier to achieve. The original statute required a minimum wage of at least 125 percent of the state's median wage for at least 51 percent of new employees to qualify for the credit.7 With the enacted changes, a wage of only 100 percent of the state's median wage for production occupations is required for new employees hired in rural locations.8 Also, the original QFTC qualification terms which required companies to subsidize 80 percent of employee healthcare costs have been modified to require only a 65 percent subsidy.9 Finally, taxpayers leasing a build-to-suit facility may now include the amount spent on the facility by a third-party developer as a qualifying investment.10

While many provisions serve to increase the ability to qualify for the QFTC, a clawback provision has also been added. Specifically, the legislation requires taxpayers to notify the Arizona Department of Revenue on an annual basis of any full-time employment position for which a credit was claimed which has been vacant for more than 150 days from the date it was originally filled until the end of the taxable year. The portion of the credit claimed for the taxable year must be decreased by $4,000 for each unfilled position.11

Data Center Tax Relief Program

In recognition of the fact that data centers have a significant impact on state and local economies, Arizona has amended its existing incentive program which exempts data center equipment purchases from both the retail transaction privilege tax and the use tax.12 Generally, these changes to the Data Center Tax Relief Program aim to broaden the types of eligible data centers and streamline the process of purchasing eligible tax-exempt equipment. To qualify, a computer data center must either create a minimum of $25 million in new investment if the center is located in a county with a population of 800,000 or less, or a minimum of $50 million in new investment if the center is located in a county with a population of more than 800,000.13 Alternatively, qualification is available for computer data centers that created a minimum investment of $250 million during the 72 months immediately before September 1, 2013.14

While the initial program only considered owned properties for purposes of determining whether the investment thresholds had been reached, the new legislation allows taxpayers to include leased buildings, as well as improvements made to existing structures.15 The previous requirement to present an exemption certificate at the time of purchase of capital investments has been eliminated.16 Finally, certified data center owners may now substantially demolish all or part of an existing building to the extent reasonably necessary to accommodate future data centers, as well as expand existing data centers, without losing their certification.17

Notably, taxpayers should be aware that the ACA has the right to revoke the data center exemption immediately if the ACA determines that the applicant does not meet the requirements of the program. This could result in a recapture of all or part of the tax relief originally provided to the taxpayer.18

Commentary

The expansion of the QFTC and the Data Center Tax Relief Program highlights Arizona's continued commitment to encouraging business investment and expansion within its borders. The extension of the refundable QFTC will provide a robust incentive for the next six years for businesses looking to expand or relocate to Arizona.

Arizona's changes to its Data Center Tax Relief Program reflect a growing legislative trend across the country in the form of data center tax incentives. In 2015, Alabama, Arizona, Iowa, Nebraska, Nevada, and Texas enacted legislation aimed at attracting the data center industry. With this legislation, Arizona has broadened the scope of qualifying capital investment for its data center tax exemption program and streamlined the process for purchasing qualified tax-exempt equipment, making it a strong player in this increasingly competitive field.

Footnotes

1 H.B. 2584 and H.B. 2666, Laws 2016 (signed May 19, 2016).

2 H.B. 2815, Laws 2012; Arizona Commerce Authority Web site.

3 ARIZ. REV. STAT. §§ 41-1512; 43-1083.03; 43-1164.04.

4 ARIZ. REV. STAT. § 41-1512.X.5, 9.

5 ARIZ. REV. STAT. § 43-1164.04.B.

6 ARIZ. REV. STAT. §§ 41-1512.H; 43-1083.03.A; 43-1164.04.A.

7 ARIZ. REV. STAT. § 41-1512.C.2.

8 See ARIZ. REV. STAT. § 41-1512.X.10, defining "rural" as tribal lands, a city or town with a population of less than 50,000, or a county with a population of less than 800,000. Note that the wage requirement remains at 125 percent of the state's median wage for production occupations for other new employees

9 ARIZ. REV. STAT. § 41-1512.C.3.

10 ARIZ. REV. STAT. § 41-1512.X.9.

11 ARIZ. REV. STAT. §§ 43-1083.03.J; 43-1164.04.J.

12 House Summary for H.B. 2584, Arizona House of Representatives, May 6, 2016.

13 ARIZ. REV. STAT. § 41-1519.E.1.

14 ARIZ. REV. STAT. § 41-1519.E.2.

15 ARIZ. REV. STAT. § 41-1519.E.

16 ARIZ. REV. STAT. § 42-5061.A.57.

17 ARIZ. REV. STAT. § 41-1519.L.

18 ARIZ. REV. STAT. § 41-1519.G.

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