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By George Wolfe

On June 23rd, the South Carolina Economic Development Competitiveness Act of 2010 (H. 4478, R. 351) (the “Act”) became law. To view the Act, please click here.

The Act contains a number of useful changes to existing law that will support economic development in South Carolina.

Among the areas in which the Act makes the most significant changes are the following:

• Endowed chairs program.
  • Allows certain large private sector investments to serve as basis for endowed chairs if certified by Secretary of Commerce.
• State Ports Tax Credit.
  • Provides for credit against employee withholding taxes.
• Stimulus Act Bonds
  • Provides a process for the reallocation of South Carolina bond capacity under the 2009 federal Stimulus Act in order to maximize the use of that capacity.
• Fee-in-lieu of taxes.
  • Extends benefit period by 10 years.
  • Allows modification of method for valuing real property.
• Special Source Revenue Credit/Bond.
  • Allows expenditures on machinery and equipment to serve as basis for credit/bond.
• Investment Tax Credit.
  • Extends credit to entire state.
• Jobs Tax Credit.
  • Removes special exceptions for the categorization of counties, so that counties will be categorized based solely on objective economic criteria.

 

A summary of the changes made by the Act is provided below.

FEE-IN-LIEU OF TAXES (FILOT) (Sections 2-6 and 8-12 of the Act).

There are three separate FILOT statutes that provide mostly comparable benefits – the “Big Fee” Statute (which requires a $45 million minimum investment, transfer of project title to a county, and a bond issuance), the “Small Fee” Statute (which requires a $2.5 million minimum investment and transfer of project title to a county), and the “Simple Fee” Statute (which requires a $2.5 million minimum investment). The Act amends all three of these statutes, as described below.

• Minimum Multi-Company Investment. The Act reduces the multi-company FILOT minimum total investment under the Small Fee and Simple Fee Statutes from $10 million to $5 million for manufacturing, research and development, corporate office, and distribution facilities. This makes it easier for companies coming together to invest in a single project to avoid the otherwise applicable $2.5 million minimum investment by each company.
• Term.
  • The Act increases by 10 years – from 20 years to 30 years - the term of the FILOT "benefit period" for “regular” fees.
  • The Act also increases by 10 years – from 30 to 40 years – the term of the FILOT benefit period for “enhanced fees,” at least under the Big Fee and Small Fee Statutes.
  • Parties can amend existing FILOT agreements to provide for this 10-year increase.
  • When taken together with the 10-year extension available under present law, the Act provides for a possible total benefit period of up to 40 years (for regular fees) and 50 years (for enhanced fees).
• Real Property Valuation. Present law requires the value of real property to be set at its original income tax cost basis for the duration of the FILOT agreement. The Act allows a county and a company to agree to value real property subject to a fee at its fair market value as determined by periodic reappraisal, just as if such property were subject to regular property taxes. Parties can amend existing FILOT agreements to provide for this change, which may be helpful to projects with buildings that have declined or will decline in value.
• Property Placed in Service Prior to FILOT Agreement. The Act provides that property placed in service pursuant to an inducement agreement or inducement resolution prior to execution of the FILOT agreement is eligible for a FILOT agreement even if such property has been subject to property taxes before the execution of the FILOT agreement. This is a technical change from present law that removes a trap for the unwary.
• Nuclear Facilities. The Act lengthens certain FILOT time periods in recognition of the fact that nuclear facilities take longer to permit and construct than other projects. For qualifying nuclear projects involving an investment of at least $1 billion, the Act provides (i) up to 15 years after an inducement resolution or inducement agreement before a fee agreement must be entered into, and (ii) a 10-year investment period.

 

SPECIAL SOURCE REVENUE CREDIT/BOND (Section 7 of the Act).

Present law authorizes counties to provide a Special Source Revenue Credit (SSRC) or Special Source Revenue Bond (SSRB) to the extent that the property owner incurs expenditures for infrastructure or improved or unimproved real estate used for manufacturing or commercial purposes.

The Act adds machinery and equipment as qualifying expenditures for SSRC/SSRB purposes. However, the Act also provides that if a company removes machinery and equipment that serves as the basis for an SSRC or SSRB before the end of the FILOT agreement, the company must pay the otherwise applicable FILOT payment on such property for the two years following its removal.

MANUFACTURER’S WAREHOUSE PROPERTY TAX (Section 13 of the Act).

The Act provides a 6% assessment ratio for real property owned by or leased to a manufacturer and used primarily, rather than exclusively as under present law, for warehousing and wholesale distribution.

Such warehouse or wholesale distribution real property must not be physically attached to a manufacturing plant unless the warehousing and wholesale distribution area is separated from the manufacturing plant by a permanent wall.

RURAL INFRASTRUCTURE FUND (Section 14 of the Act).

The Act adds the following to the list of eligible expenditures for which the Coordinating Council may provide financial assistance to local governments for infrastructure and other economic development activities in the less prosperous areas of the state:

• Site preparation;
• Acquiring or improving real property; and
• Relocation expenses (but only for employees to whom a company is paying gross wages at least two times the lower of state or county per capita income).

 

SOUTH CAROLINA VOLUME CAP ALLOCATION ACT (Section 15 of the Act).

The Act creates the “South Carolina Volume Cap Allocation Act,” which provides a process, through the State Budget and Control Board, for the reallocation of county and large municipality volume caps for bonds to be issued under the American Recovery and Reinvestment Act of 2009.

Among the bonds impacted are recovery zone facility bonds, recovery zone economic development bonds, and qualified energy conservation bonds.

The objective is to maximize the issuance of such bonds for projects within South Carolina before the authorization to issue them terminates at the end of 2010 (unless extended by Congress).

JOBS TAX CREDITS (JTC) (Section 16 of the Act).

The Act’s changes to the JTC statute include the following:

• Adds "agribusiness operations" to the list of facilities qualifying for JTCs.
• Reduces the county tiers from five to four, and identifies those tiers by number – from IV to I – rather than words; determines tiers based solely upon the original criteria of unemployment rate and per capita income; and removes all special exceptions (the removal of special exceptions automatically removes one of the existing five tiers).
• Provides for the following amounts of credit for each county tier:
  • Tier IV -- $8,000
  • Tier III – $4,250
  • Tier II – $2,750
  • Tier I -- $1,500
• By way of comparison, the following are the county tiers/credit amounts under present law (before the Act):
  • Distressed -- $8,000
  • Least Developed -- $4,500 (this is the tier that is removed by the Act)
  • Under Developed -- $3,500
  • Moderately Developed -- $2,500
  • Developed -- $1,500

 

STATE PORTS TAX CREDIT (Section 17 of the Act).

Present law provides for a credit in an amount determined by the Coordinating Council against state income taxes for a company which uses port facilities in this state and which increases its port cargo at such facilities by at least 5% in a single year over its base year port cargo volume. There is a total annual cap of $8 million on the credit.

The changes made by the Act include the following:

• Up to $4 million out of the $8 million annual cap may be provided as a credit against employee withholding taxes.
• Up to $1 million of the $8 million annual cap may be provided to a new warehouse or distribution facility committing to a minimum $40 million investment and the creation of 100 jobs, without regard to the base year cargo provisions.

 

The Coordinating Council continues to be authorized to determine the amount of the credit, as under present law.

UTILITY TAX CREDIT (Section 18 of the Act).

The Act adds to the list of qualifying projects eligible for this credit incubator buildings whose ownership is retained by a county, political subdivision, or agency of the State.

JOB DEVELOPMENT CREDITS (JDC) (Section 19 of the Act).

The Act’s changes to the JDC statute include the following:

• The Act conforms the county tier structure for JDC purposes to the above-described Jobs Tax Credit changes:
  • Tier IV – 100% JDC.
  • Tier III – 85% JDC.
  • Tier II – 70% JDC.
  • Tier I – 55% JDC.
• The Act adds the following expenditures as “qualifying expenditures” for JDC purposes:
  • Operating leases with terms of at least 5 years; and
  • Employee relocation expenses, but only where such employees are being paid at least two times the lower of the state or county per capita income.

 

INVESTMENT TAX CREDIT (Sections 20-21 of the Act).

The original investment tax credit statute, passed in 1995, was intended to help offset the impacts of the job losses at Charleston Naval Base and Savannah River. That statute provided a credit against income tax with respect to qualifying manufacturing property where such property is first used in a qualifying area, which included 27 of the state’s 46 counties. The credit equaled 1% to 5% of the cost of such property, depending upon the depreciable life of the property in question.

The Act expands the qualifying area to all 46 counties, so that the credit now applies throughout the state.

To minimize the fiscal impact of this geographic expansion, the Act also cuts the amount of the credit in half, so that the credit now ranges from 0.5% to 2.5%.

BIODIESEL RESEARCH AND DEVELOPMENT TAX CREDIT (Section 22 of the Act).

The Act amends the state income tax credit for qualified research and development expenditures to include expenditures relating to waste grease-derived biodiesel.

RENEWABLE ENERGY FACILITY CREDIT (Section 23 of the Act).

The Act provides an income tax credit equal to 10% of the cost of a company’s qualifying investments in plant and equipment for renewable energy operations. To qualify a company must do each of the following:

• Manufacture renewable energy systems and components in South Carolina for solar, wind, geothermal or other renewable energy uses;
• Invest at least $500 million in a new renewable energy facility in South Carolina; and
• Create at least 1.5 jobs for every $500,000 of capital investment and pay 125% of state average annual median wage for such jobs.

 

The credit is for a 5-year period from 2010 through 2015.

A taxpayer’s total credit under this section cannot exceed $500,000 annually, or $5 million in total.

RENEWABLE ENERGY MANUFACTURING ACT (Sections 24-28 of the Act).

The Act amends the “South Carolina Life Sciences Act” to make it the “South Carolina Life Sciences Act and Renewable Energy Manufacturing Act.” As part of this amendment, the Act does the following:

• “Renewable energy manufacturing facility” is defined as a business which manufactures (i) qualifying machinery and equipment for use by solar and wind turbine energy producers or (ii) qualifying batteries for certain alternative energy motor vehicles.
• The South Carolina Energy Office is authorized to determine whether a facility qualifies as a renewable energy manufacturing facility.
• Qualifying renewable energy manufacturing facilities involving investments of $100 million and 200 new jobs with an annual average cash compensation of at least 150% of the lower of state or county per capita income are entitled to the following benefits:
  • The manufacturing machinery and equipment used at such a facility is entitled for property tax purposes to a 20% annual depreciation rate rather than the 11% rate that would otherwise apply to such machinery and equipment.
  • Any taxpayer establishing such a facility may enter into an income apportionment contract with SCDOR, with a term not to exceed 15 years.
  • The Coordinating Council may allow up to 95% of Job Development Credits to be provided with respect to the employees of such facility, even if such Job Development Credits would otherwise be subject to a lower limit (55% or 70% or 85%) based on the tier for the county in which the jobs are located.

 

SET-ASIDE FUNDS (Section 29 of the Act).

The Act adds the following to the list of eligible expenditures for which the Coordinating Council may make grants from the Council’s “set-aside” fund to which $18 million is annually appropriated:

• Improving real property;
• Pollution control equipment; and
• Relocation expenses (but only for employees to whom a company is paying gross wages at least two times the lower of state or county per capita income).

 

ENDOWED CHAIRS (Section 30-31 of the Act).

The Act provides that 25% of the appropriations for Endowed Chairs shall be awarded by the Endowed Chairs review board pursuant to recommendations by the Secretary of Commerce.

The Secretary of Commerce may request that the review board award an endowment of up to $2 million for each “significant capital investment” committed by a “qualified project or industry.” Upon a decision by the review board to make an allocation for such endowment, the qualified project or industry sector will have 36 months from the date of allocation to make such investment. Once the significant capital investment has been made, the Secretary of Commerce shall certify to the review board and the review board shall make awards for one or more endowed professors who will directly support the industry in which the significant capital investment is made.

“Qualified projects or industries” are those that make a significant capital investment in South Carolina after January 1, 2010 in certain specified activities or in other activities as determined by the Secretary of Commerce.

“Significant capital investment” means a private investment of at least $100 million in a single project or at least $500 million in an industry sector.

Importantly, the otherwise applicable requirement for non-state matching funds does not apply to Endowed Chairs funded pursuant to this process.

This provision will allow a portion of the Endowed Chairs funds to more closely track the direction of the South Carolina economy as evidenced by significant private investments. This provision also adds an incentive that the state can use in recruiting significant investments in economic sectors that the state wants to promote.

WORKFORCE AGENCY MEMBERSHIP ON COORDINATING COUNCIL (Section 32 of the Act).

The Act replaces the chairman of the South Carolina Employment Security Commission with the Executive Director of the newly created Department of Employment and Workforce as a member of the South Carolina Coordinating Council for Economic Development.

FINANCING WATERWAY IMPROVEMENTS (Section 33 of the Act).

The Act authorizes the creation of municipal improvement districts to widen and dredge the waterways of the State by issuing bonds payable from assessments in that district. In certain instances, such bonds may be secured in whole or in part by the full faith, credit and taxing power of the municipality.

EXTENSION OF REDEVELOPMENT AUTHORITY FUNDING (Section 34 of the Act).

The Act extends for two years (from 2015 to 2017) the redevelopment fees that may be provided to certain redevelopment authorities created in response to the closure or realignment of a military installation such as Charleston Naval Base. These fees are equal to 5% of state employee withholding taxes paid to employees of the federal government located at such bases.

TAX REVENUES FOR TOURISM (Sections 35 and 36 of the Act).

The Act increases from 20 to 50% the amount of local accommodations and hospitality tax revenues that cities and counties without a high concentration of tourist activity may spend on certain tourism-related activities.

REPEAL OF ACT 150 OF 2010 (Section 37 of the Act).

The Act repeals Act 150 of 2010. Act 150 provided a tax credit equal to one-half of income taxes paid by S-corporations with a capital investment of $500 million and at least 400 jobs. The amount of the credit was to be paid to the Coordinating Council by use for a city or council for public infrastructure relating to the qualifying project.

REPEAL OF OUTDATED BASE CLOSURE PROVISIONS (Section 38 of the Act).

The Act repeals certain outdated statutory provisions related to the closure of the Charleston Naval Base.

EFFECTIVE DATES (Section 39 of, and elsewhere in, the Act).

The Act takes effect on January 1, 2011, subject to a number of exceptions, as described below.

The Act provides that the following sections take effect upon approval of the Act by the Governor:

• Section 6 (all of the Big Fee changes).
• Section 8 (Small Fee – certain nuclear facility changes; 10-year increase in benefit period).
• Section 9 (Small Fee – certain nuclear facility changes).
• Section 15 (Volume cap reallocation).
• Section 25-28 (Renewable Energy Manufacturing Act).
• Section 37 (repeal of Act 150 of 2010).
• Section 38 (repeal of certain outdated Code sections).

 

Some sections have their own effective date provisions, including the following:

• Section 2 (Small Fee). $5 million minimum for Small Fee multi-company deals.
  • Effective for new agreements entered into after 2010, but existing agreements may be amended to incorporate such $5 million minimum.
• Section 3 (Small Fee). 10-year increase in benefit period.
  • Effective for new agreements entered into after 2010, but existing agreements may be amended to incorporate such 10-year increase.
• Section 4 (Small Fee). Real property valuation.
  • Effective for countywide reassessments after 2010.
• Section 6 (Big Fee). All Big Fee Changes
  • Effective upon approval by the Governor, except for the 10-year increase in the benefit period, which is effective for new agreements entered into after 2010; however, existing agreements may be amended to incorporate such 10-year increase.
  • Changes in real property valuation are effective for countywide reassessments after 2010.
• Section 8 (Simple Fee). Certain nuclear facility changes. 10-year increase in benefit period.
  • Effective upon approval of Governor, except for the 10-year increase in the benefit period, which is effective for new agreements entered into after 2010; however, existing agreements may be amended to incorporate such 10-year increase.
• Section 10 (Simple Fee). Real property valuation.
  • Effective for countywide reassessments after 2010.