Newbie Seminar
Utility Tax Credit
Burnet R. Maybank, III
Nexsen Pruet, LLC
1230 Main Street, Suite 700
Columbia, SC 29201
803-771-8900
[email protected]
Burnet R. Maybank, III
Utility Tax Credit
General
A business subject to the utility license tax must
give cash to an eligible project and that cash
must be used to pay for qualifying infrastructure
in order for the business to claim the credit
against the license tax on its tax return
Burnet R. Maybank, III
Utility Tax Credit
General
• In order to qualify for the tax credit, a utility
must give cash funds for:
 Eligible infrastructure (e.g. roads, water or
sewer); and an
 Eligible project (e.g. a manufacturer which
builds a facility at a green field site)
 Utility must meet both requirements
Utility Tax Credit
Who may claim the credit
The credit is claimed against the license tax imposed by
§ 12-20-100 of the Code which is paid by the following
companies
1. SC1120U express, street railway, navigation, waterworks,
power, light, gas, telegraph, and telephone companies; and
2. CL-4 electric cooperatives
Burnet R. Maybank, III
Utility Tax Credit
Limitations on the Credit
• $400,000 a year and can carryover $400,000 for one
year
• Utility cannot own, manage, lease or operate the
qualifying infrastructure
• Cannot also claim the infrastructure income tax
credit for the qualifying infrastructure
Burnet R. Maybank, III
Utility Tax Credit
Cash Requirements
Must give cash for qualifying infrastructure
• Must be given by the end of the taxable year
in which utility wants to claim the credit
• Check will qualify if given in ordinary
course of business
Burnet R. Maybank, III
Utility Tax Credit
General
What Qualifies as an Eligible Project
Qualification Option 1: Eligible Project
• Income tax credits under Chapter 6
• Job Development Credits
• Capital Investment (formerly EIZ) Credit
• Fee in Lieu
 Chapter 12, Title 4 (Little Fee)
 Chapter 29, Title 4 (Big Fee), or
 Chapter 44, Title 12 (Simplified Fee)
Utility Tax Credit
General
Eligible Project
Qualification Option 2: Public Office Park
• Located in office, business, commercial, industrial
park, or combination;
• Used exclusively for economic development, and
• Owned or constructed by county, political
subdivision, or agency of State when the qualifying
improvements are paid for
• Must meet all three to qualify
Burnet R. Maybank, III
Utility Tax Credit
What is Qualifying Infrastructure
All qualifying infrastructure must be necessary, suitable
and useful to the project
Types of qualifying infrastructure
(1) Improvements to both public or private water,
wastewater, and sewer systems
(2) Improvements to both public or private electric,
natural gas, steam and telecommunications systems
(3) Fixed transportation facilities including highway, road,
rail, water, and air
Utility Tax Credit
Qualifying Infrastructure
For public PARK PROJECTS ONLY
(Qualification Option 2):
(4) Shell buildings, incubator buildings, and
purchase of land for park
(5) Due diligence expenditures relating to
environmental conditions after county or
political subdivision acquires contractual
rights to industrial park, including option
to purchase
Utility Tax Credit
Qualifying Infrastructure
For public Park Projects only:
Due diligence expenditures include such
items as Phase I and Phase II studies and
environmental or archeological studies
required by state or federal statutes or
guidelines or similar lender requirements.
Utility Tax Credit
Qualifying Infrastructure
For public Park Projects only:
Site preparation costs include, but are not limited to:
(a) clearing, grubbing, grading, and stormwater
retention; and
(b) refurbishment of buildings that are owned
or controlled by a county or municipality and are
used exclusively for economic development
purposes.
Utility Tax Credit
Qualifying Infrastructure
• How do you determine if infrastructure is necessary,
suitable, or useful to the project?
 Construed to achieve a public purpose
 Scope and cost of infrastructure must be reasonable
and considering scope and cost of project
• Must the eligible project actually receive or use one of the
qualifying credits to qualify under Qualification Option 1?
 No, just must qualify – invest proper amount, created
required number of jobs, have right type of equipment
Utility Tax Credit
Qualifying Infrastructure
• Can a taxpayer claim credit if infrastructure is not
completed by end of the year?
 Yes, but what if infrastructure is never
completed or is not done after 3 years?
 Money must be paid back before the end of the
3rd year after the credit was originally claimed
 Claiming credit requires waiver of limitations
period
• Must the project be in utility’s service area?
 No, and the utilities can pool their money
Utility Tax Credit
Examples of Qualifying Infrastructure
•
•
•
•
•
Outside fiber optic cable or water and sewer lines
Access road to county owned industrial park
Widening turn lane at fixed transportation facility
Taxiway to runway facility
Construction entrance tie-in to public road
Utility Tax Credit
Not Qualifying Infrastructure
• One building may not constitute a county-owned
industrial park
• Fire sprinkler system in shell building
• Curbs on an ineligible road
• Ordinary tapping fees
• Improvements to private property that do not serve
a public purpose
• Public works projects such as schools, courthouses,
county offices, county recreation facilities and
county hospitals
Utility Tax Credit
Funding for Spec Projects
• May a utility provide UTC funding for an
industrial park or mega site owned by the
private sector for the purpose of attracting a
future (but unidentified) tenant?
Utility Tax Credit
Spec Projects
• The SCDOR has explicitly allowed funding for
projects which don’t take place until next year.
SC DOR Revenue Ruling, 96-11 accordingly states:
• Question: Can a company be eligible to claim the
credit under Section 12-6-3490 [now Section 12-20105] of the Code, claim the credit for amounts paid in
cash in the current year, even though construction of
the infrastructure will not commence until the next
year?
Utility Tax Credit
Spec Projects
• Answer: Yes. Code Section 12-6-3490 [12-20-105]
provides that the credit is available for amounts paid in
cash to provide infrastructure to a qualifying project.
The statute does not require that the infrastructure must
be in place or under construction in the year in which
such amounts are paid. However, in order to claim the
credit allowed by Section 12-6-3490 [12-20-105] of the
Code, the amounts must actually be paid in cash for
infrastructure and cannot just be accrued by the
company claiming the credit.
Utility Tax Credit
Spec Projects
• Answer Continued: If the infrastructure has not been
substantially constructed, the company must confirm
that the amounts paid will be used for infrastructure at
the project, otherwise the credit may not be claimed by
the company. In order to meet this requirement, a
company claiming the credit must execute a waiver of
the statute of limitations under Section 12-54-85.
Burnet R. Maybank, III
Utility Tax Credit
Spec Projects
The SCDOR has never answered whether a utility can fund
an unidentified project. Their policy documents and tax
return instructions clearly make this problematic.
Utility Tax Credit
Spec Projects
For example, DOR Rev. Rule #96-11 states:
Question: How does a company apply for the credit allowed
by Section 12-6-3409?
Answer: A company may apply for the credit…by claiming it
on the proper line of the company’s CL-4 or SC1120U and by
attaching a schedule to the return setting for the name of the
person completing the project, a description of the project,
under what section or sections of the statute the project
qualifies, the amounts in cash that were paid for infrastructure
and to whom and when paid, a description of the
infrastructure, and the date the infrastructure was completed
or is expected to be completed. (Emphasis added.)
Utility Tax Credit
Spec Projects
The tax returns filed by utilities also make this problematic.
The instructions for the electricity utility income tax return,
SC1120U provides:
Line 17 Instructions – If the company paid cash to provide
infrastructure for an eligible project, enter the amount on
Line 17. Attach a schedule to the return setting forth the
name of the person completing the project, a description of
the project, under what section or sections of the statute the
project qualifies, the amounts in cash that were paid for
infrastructure and to who and when paid, a description of
the infrastructure, and the date the infrastructure was
completed or is expected to be completed. (Emphasis
added.)
Utility Tax Credit
DOR COMFORT LETTER
Utilities can apply for a non-binding “comfort
letter” for UTC funding.
Burnet R. Maybank, III
Utility Tax Credit
DOR COMFORT LETTER
A Comfort letter Request should provide:
1. Introductory material (Name, Address,
FEI No. of Utility)
2. Second Paragraph (Next Slide)
3. Third Paragraph (Next Slide)
4. Contact person(s)
5. $35 check
Utility Tax Credit
DOR COMFORT LETTER REQUEST
Second Paragraph
Give the name and location of the project and specifically
identify by code section the income tax credit, withholding
tax credit, or fee in lieu of property taxes described in
Code Section 12-20-105(B) for which the project qualifies.
Give details on why the project qualifies under the
particular code section.
Utility Tax Credit
DOR COMFORT LETTER REQUEST
Third Paragraph
Describe and explain how the project qualifies as an
“infrastructure project” under Code Section 12-20105(C). Also, provide the amount and description of
anticipated payments.
Utility Tax Credit
ANNUAL REPORTING REQUIREMENT
In 2010, the General Assembly amended the RDA, Section
12-20-105, to include a new annual reporting requirement.
New subsection (H) states:
(H) By March first of each year, the Department of
Revenue shall issue a report to the Chairman of the Senate
Finance Committee, the Chairman of the House Ways and
Means Committee, and the Secretary of the Department of
Commerce outlining the history of the credit allowed
pursuant to this section and the types of infrastructure to
eligible projects.
Utility Tax Credit
ANNUAL REPORTING REQUIREMENT
The only way the DOR can comply with the annual
reporting requirements is to start closely examining the
schedule attached to Line 17 referenced above for each
electric utility which claims the credit. I will speculate
that they now look at the schedule much closer than they
did in prior years.
Utility Tax Credit
Recent Statutory Changes
Per H.3720, the maximum credit which a
utility can take is now raised to $400K (up
from $300K)
Utility Tax Credit
Recent Statutory Changes
For industrial parks owned by public entities, eligible
expenditures now include:
1. Site prep costs including clearing, grubbing, grading
and storm water retention; and
2. Refurbishment of buildings that are owned “or
controlled” by a county or municipality and are used
exclusively for economic development.