On November 11^th, 2013, the City of Cupertino extended a sales tax rebate agreement with Baz Industries, Inc., a consulting company representing Apple. Anticipating that Apple’s proposed second campus may significantly impact the local traffic and impose a greater challenge for Cupertino to provide adequate public services, the extended agreement reduced the sales tax rebate rate from 50% of sales tax increment generated by Apple product sales to 35%.

Cupertino and Apple first entered into a sales tax rebate agreement in 1997. Because local governments in California receive 1% of local sales taxes for all sales occurred in their jurisdiction, incremental sales taxes are used as an economic development tool.  To foster economic development and incentivize more sales taxes, Cupertino agreed to reimburse approximately 50% of the local sales tax increment generated by Apple. In return, Apple agreed to designate Cupertino as its point of sales for a portion of its online sales. Such a sales arrangement enabled Cupertino to receive more local sales taxes. The incremental sales taxes were calculated as the difference between the total amount of Apple’s products related sales taxes Cupertino received and the portion of sales taxes attributable to sales occurred at the Apple store located in Cupertino R&D campus.

The agreement has been extended for several times since 1997 and brought mutual benefits to Apple and Cupertino. In 2012 alone, Apple reported approximately $1.3 billion taxable sales occurred in Cupertino with a majority attributable to its online sales of Apple’s products. Based on the 1% local sales tax rate and the 50% rebate rate, it is estimated that Apple received over $6 million from Cupertino as sales tax incentives and Cupertino also strengthened its tax base by over $6 million in sales taxes.

Illinois Supreme Court’s recent opinion (Hartney Fuel Oil Company v. Hamer) closed a regulatory loophole regarding local sales tax sourcing. The Supreme Court declared that the bright-line test currently used by the Illinois Department of Revenue to determine sales tax situs narrowed the scope of the related tax regulations and was therefore invalid.

The case examines the tax strategy of Hartney. To minimize its Illinois sales tax liability, Hartney accepted purchase orders in the Village of Mark, Illinois, where the overall sales tax rate was lower, but conducted all of its sales related activities in the Village of Forest View, Illinois, where the rate was higher. The Department of Revenue applied its bright-line test to determine the sales situs, “where purchase orders are accepted, tax liability is incurred.” By establishing an office in the Village of Mark to accept purchase orders, Hartney established the Village of Mark as its sale situs and lowered its sales tax liability in 2005 through 2007.  In 2008, the Department of Revenue determined that Hartney’s sales situs should be the Village of Forest View and found Hartney liable in the amount of approximately $23 million in unpaid sales tax.

Hartney paid the $23 million in back taxes, interests and penalty but subsequently filed a challenge to the Department of Revenue’s decision. The Department of Revenue lost at the trial and appellate court levels and then appealed to the Supreme Court. In November 2013, the Supreme Court stated “While we do not find Hartney’s approach to retail occupation tax liability consistent with the statute . . . the Company did act consistently with the Department’s regulations published at the time.” The Supreme Court upheld the lower court decisions entitling Hartney to reimbursement of sums paid.

It is anticipated that the Supreme Court’s opinion in this case may discourage similar sales tax strategies in Illinois.

Recently, the City of Chicago created a user-friendly TIF Portal, further advancing Chicago’s commitment to providing information about TIF.

The new TIF Portal is an interactive map that allows public access to TIF information in a more intuitive and convenient way. Specific information about TIF such as District plans, annual reports and project redevelopment agreements have been available on the City of Chicago’s website since the Daley administration. However, the information was generally organized under alphabetical listings and was difficult to locate for those who did not know the name of a specific TIF District.

The new TIF Portal substantially resolves the access issue by delineating the boundaries of each TIF District, pinpointing each project’s location within those boundaries and providing summarized information for each TIF District and project.  The Portal also provides links to specific webpages showing detailed TIF information. The Portal depicts TIF Districts on a map, enabling the user to quickly obtain information without knowing the specific District name. In addition, the Portal provides a search function by inputting a specific address, ward, TIF district or TIF project name.

The TIF Portal is available at http://webapps.cityofchicago.org/ChicagoTif/

On June 25^th, 2013, the Cook County Clerk’s office released the 2012 property tax rates. In comparison with the 2011 property tax rates, the 2012 property tax rates are significantly higher. For example, the property tax rate for a majority of properties located in the City of Chicago increased by 17% from 5.455% to 6.396%.

The 2012 property tax rate hike is primarily caused by a substantial decrease of equalization assessed value (EAV) for most properties in Cook County. The property tax rate is determined by both the approved property tax levy and the combined EAV of all properties (Property Tax Rate = Tax Levy / EAV), while EAV for each property is determined by the property’s assessed value (AV) and an equalization factor issued by the State (EAV = AV x Equalization Factor). Because the 2012 State equalization factor was reduced by 5.55% from 2.9706 to 2.8056 and most property AVs become lower, reflecting a market value decrease, an across-the-board property EAV reduction resulted. For example, the overall EAV decreased by approximately 13% in Chicago with some residential property EAV dropping up to 20%.

Although the property tax rate increased significantly, the 2012 tax levied on a property in Cook County may not necessarily rise. Because the amount of property tax is determined by the property’s equalization assessed value (EAV) and the tax rate (property tax amount = EAV x Tax Rate), the amount of property tax levied on a property may actually remain the same or even become less if the level of the property’s EAV decrease exceeds the tax rate increase.

On the other hand, the EAV decrease may negatively impact the 2012 TIF district performance especially for those districts with a relatively large TIF EAV base.  When a TIF district is established, the total EAV of all properties within the TIF district is recorded as the TIF EAV base. Only the property tax attributed to EAV growth above the EAV base is collected as TIF dollars and can be used to assist public infrastructure and development projects.  Because the TIF EAV base is fixed, the TIF EAV reduction may negatively impact TIF dollars even if the overall property tax generated by the TIF District increases due to the property tax rate rise. For example, TIF District A has a base EAV of $1,000,000 and its current total EAV is $1,500,000. Under a tax rate of 1%, TIF District A can generate $15,000 ($15,000 = $1,500,000 x 1%) in property tax, of which $5,000 can be collected as TIF dollars ($5,000 = ($1,500,000 – $1,000,000) x 1%).  Suppose the overall TIF EAV decreases by 30% from $1,500,000 to $1,050,000 but the tax rate increases by 50% from 1% to 1.5%, the overall property tax generated by the TIF district will increase by 5% from $15,000 to $15,750 ($15,750 = $1,050,000 x 1.5%). However, the TIF dollars generated by the TIF EAV increment will decrease by 85% from $5,000 to $750 ($750 = ($1,050,000 – $1,000,000) x 1.5%).

On March 6^th, 2013, Alabama Governor Robert Bentley signed into law the Major 21^st Century Manufacturing Zone Act (SB 96).  The law provides local government with authority to use TIF to attract industries with a public interest.

SB 96 authorizes local governments to create manufacturing zones of at least 250 acres which are suitable sites for manufacturing facilities for targeted industries such as automotive, aviation, medical, pharmaceutical, computer, electronics and energy conservation industries.  In addition, an anticipated aggregate capital expenditure by manufacturers in the zone of at lease $100 million is required for the creation of a manufacturing zone.

To provide TIF in a manufacturing zone, not less than 50% of the TIF district area created must be designated as a manufacturing zone. The term of the TIF district is up to 35 years.

To attract manufacturing companies, SB 96 allows local governments to expand the use of TIF funds to apply TIF revenues for private improvements as well as public works within manufacturing zones. Eligible private improvements include the construction of privately owned manufacturing facilities, equipment, redevelopment, rehabilitation and conservation.

The California Legislature is currently considering AB 690 sponsored by Assembly woman Nora Campos. If AB 690 is adopted, it will restore municipalities’ ability to use tax incremental financing to construct public works projects and create jobs in areas of high unemployment.

TIF was widely used as a powerful redevelopment tool in California until 2011 when AB 1X26 eliminated all of California’s approximately 400 redevelopment agencies. Although a few lawsuits were subsequently filed to challenge the constitutionality of AB 1X26, the practice of TIF has stopped in California since then.

Under AB 690, municipalities are authorized to create Jobs and Infrastructure Financing Districts (JIDs) with 55% voter approval in high employment areas. Tax increment generated by JIDs can be used to provide necessary assistance for targeted industries to locate or expand in JIDs. In addition, AB 690 requires each JID to prepare specific job creation plans and prove that 10 prevailing wage jobs will be created for every $1,000,000 investment.

AB 690 was referred to the Local Government Committee and the Housing and Community Development Committee for review on March 11, 2013.  To read it in its entirety, visit http://www.legislature.ca.gov/cgi-bin/port-postquery?bill_number=ab_690&sess=CUR&house=B&author=campos.

Illinois continues to improve its administration over the more than 1,200 TIF Districts in the State. The Illinois Comptroller’s Office recently added an “Upload TIF Reports” application to its website. The application allows TIF administrators to directly upload annual TIF reports to the State Comptroller’s Office website. This new upload feature became available in September 2012; prior to that time, TIF administrators were limited to submitting TIF reports via a CD/DVD or by email. Allowing TIF administrators to directly upload TIF reports to the State’s website helps to streamline the publication of the TIF reports, making the information more accessible.

The new TIF reporting option is a continuation of the State’s efforts to improve the transparency and administration of TIF programs statewide. In July 2010, the State adopted the Public Act 096-1335 which requires the State Comptroller’s Office to make TIF reports available on its website within 45 days after receiving them. In addition, the State Comptroller’s Office is required to publish a list of municipalities that fail to provide required TIF information online.

Illinois requires the following information to be included in the annual TIF reports:

• Amendments to TIF District Redevelopment Plans;
• Audited financial statements of each TIF fund with more than $100,000 on deposit;
• An analysis of each TIF fund showing fund beginning and ending balances, fund sources and expenditures; and
• A description of redevelopment activities undertaken in the previous year.

The annual reports for each TIF District in Illinois are available at http://www.comptrollerconnect.ioc.state.il.us/Office/LocalGovt/ViewTIFReports/SelectLocalGov.cfm

As part of recent urban renewal and tax increment financing reform, Iowa has adopted House Bill 2460, improving TIF transparency in Iowa.

Cities and Counties in Iowa are authorized to establish urban renewal areas and rural improvement zones. TIF can be used for economic development in those zones. Under previous law, Cities and Counties were required to submit a budget on an annual basis that contained financial information for each TIF area, including actual TIF revenue and estimated and actual TIF expenditures. House Bill 2460 broadened reporting requirements to mandate that each City and County with a TIF District disclose additional information in the annual financial reports, including:

·         Area boundaries, maps and descriptions;

·         Development plans;

·         Development projects;

·         Annual expenditures;

·         Amount of indebtedness;

·         Amount and use of tax increment;

·         Balance in the TIF fund; and

·         District property values.

In addition, House Bill 2460 requires the Iowa Department of Management to create a searchable database to be available online as of December 1, 2012. This searchable database is designed to provide the public with all information included in the annual financial reports for all of Iowa’s urban renewal areas and rural improvement zones.

Click here for the searchable database.

Recently, the Utah Governor’s Office of Economic Development (GOED) agreed to provide BioFire Diagnostics, Inc., a clinical diagnostics company, with approximately $25 million in tax credits under the State Economic Development Tax Increment Financing (EDTIF) program for the company to expand its operations and create more than 650 new jobs.

Utah has widely used the EDTIF program, authorized by the Economic Development Incentives Act, in the past several years both to attract new businesses and to incentivize the expansion of existing businesses. According to GOED annual reports, more than 70 projects have been awarded a total of approximately $570 million in assistance between fiscal years 2008 and 2012 under the EDTIF program.

The EDTIF program allows the GOED to grant tax credits for corporate and individual income taxes in an amount up to 30% of the total incremental State sales taxes, corporate income taxes and individual income taxes generated by a project over a 20 year period. However, in any year, the tax credits distributed may not exceed 50% of the tax increment generated by the project in that year. Typically, projects receive assistance over a 5 to 10 year period.

In order to be eligible for EDTIF assistance, a project must be in an economic development zone and meet the following criteria:

• Receive local incentives from the municipality where the project is located;
• Enter into an incentive agreement with the GOED;
• Create at least 50 jobs;
• Pay at least 125% of county average wages if the project is located in an urban county and pay at least 100% of county average wages if the project is located in a rural county; and
• Make significant capital investment directly in the economic development zone and make purchases from Utah vendors.

EDTIF assistance is typically given to life science, technology, financial and military industries. The law specifies that EDTIF assistance is not available for retail projects.

The Lafayette, Indiana City Council has approved the issuance of up to $6.5 Million in TIF Bonds to partially pay for the construction of a fiber-optic network in Lafayette, West Lafayette and parts of unincorporated Tippecanoe County.  It is anticipated that West Lafayette will issue an additional approximately $2.5 Million in TIF Bonds for the Project.  The Bonds will be paid over 25 years from increment generated by the fiber-optic infrastructure investment.  The project will be constructed by Metro FiberNet and is estimated to cost approximately $60 Million.

Lafayette, West Lafayette and Tippecanoe County have worked to jointly establish a TIF District for this Project.  Unlike a typical TIF District, which is a designated geographic area, the TIF District for this Project will consist only of the fiber-optic infrastructure.

The municipalities believe that providing fiber-optic cable will act as an economic development tool, bringing new business and industry to the area and providing existing businesses with faster Internet capabilities.  In addition, after the Project is completed, residents of these areas will be able to subscribe to fiber optic internet, telephone and television services.