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Property Tax Basics and Related Incentives by Tushar Chikhliker, South Carolina Economic Development 101, December 2011
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Property Tax Basics and Related Incentives by Tushar Chikhliker, South Carolina Economic Development 101, December 2011

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Burnie Maybank hosted the Nexsen Pruet Newbie Seminar on December 1, 2011. The Newbie Seminar is designed for those new to the economic development field in South Carolina or those who would like …

Burnie Maybank hosted the Nexsen Pruet Newbie Seminar on December 1, 2011. The Newbie Seminar is designed for those new to the economic development field in South Carolina or those who would like some brushing up. Covered topics included basic property, sales and income taxes, as well as Bonds, the utility tax credit and FOIA.

This presentation contains the public finance portion of the seminar presented by Nexsen Pruet economic development attorney Tushar Chikhliker.

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  • 1. December 1, 2011Property Tax Basics and Incentives Nexsen Pruet Seminar Tushar V. Chikhliker Nexsen Pruet, LLC 1230 Main Street, Suite 700 Columbia, SC 29201 803-253-8261 Tushar@nexsenpruet.com
  • 2. Property Tax Basics and Related IncentivesI. Property TaxesII. Fee-in-LieuIII. Manufacturer’s AbatementIV. FILOT vs. Ad Valorem plus Manufacturer’s AbatementV. MCPs/SSRCs/SSRBsVI. Pollution Control Facilities or EquipmentVII. Filing Property Tax Return – Timing Issues for Manufacturers
  • 3. I. Property TaxesProperty Subject to Tax:• Real Property – land and all structures and other things contained in the land or annexed or attached to the land (e.g., buildings and other improvements)• Personal Property – all things, other than real estate, which have any pecuniary value (e.g., M&E)• See S.C. Code § 12-37-10 & 12-37-210 and S.C. Code of Regulations 117-1700.1• Example – Air Conditioning – Building air conditioning, incl. refrigeration equipment – Real Property – Air conditioning window units & package units – Personal Property
  • 4. I. Property TaxesEquation to calculate your property tax bill:FMV * Assessment Ratio * Millage =
  • 5. I. Property Taxes Fair Market Value (FMV):• Real Property (other than agricultural real property and FILOT real property) – appraised to determine FMV. – Generally, reassessed every 5 years, though county can delay reassessment by 1 year. – Property Tax Years after 2006 – maximum increase in FMV due to countywide reassessment is 15% in a 5-year period. – FMV of improvements added to FMV of land upon completion. – Can also be reassessed for assessable transfer of interest. – See S.C. Code § § 12-37-3120 – 12-37-3170; § 12-43-217• Personal Property – Manufacturers – From cost, fixed annual statutory depreciation down to residual value. See S.C. Code § 12-37-930. – Merchants and other Businesses – From cost, income tax depreciation down to residual value.
  • 6. I. Property Taxes Assessment Ratio (AR):AR’s are found in the SC Constitution:• Manufacturing and Utility: 10.5%• Commercial Personal Property: 10.5%• Warehouse & Distribution: 6%• Commercial Real Property: 6%• Primary Residences: 4%• Farm: 4%
  • 7. I. Property Taxes Millage:• Millage includes the combined millage for all taxing entities within jurisdiction. – Always includes county and school district; sometimes includes municipalities or special purpose districts. – Determined by each taxing jurisdiction by dividing cost of its annual budget by the total assessed value within taxing jurisdiction. – Restrictions in millage increases.
  • 8. II. FILOT The Basics:• 3 FILOT Statutes/Acts – Most commonly used today – Title 12, Ch. 44 of S.C. Code (Simplified FILOT)• Procedure – Inducement & Ordinance• Minimum Requirements: – Standard FILOT • $2.5M ($1M for certain counties or in Brownfields Voluntary Cleanup Scenarios) – Super Fee/Enhanced Investment FILOT • $150 M and 125 new full-time jobs or $400M
  • 9. II. FILOT• Investment Periods – Standard FILOT – 5th anniversary of end of property tax year in which FILOT property initially placed in service. – Super Fee/Enhanced Investment FILOT – 8th anniversary of end of property tax year in which FILOT property initially placed in service. – Extensions – both periods may be extended by up to 5 more years (but not to reach statutory minimums). – 15-year investment period available for very large investors in SC.• FILOT Term – (up to?) 30 year rolling payment period – possible extension of 10 years• Other “rifle shot” qualifiers• FILOT arrangement affects all 3 variables in property tax formula – (1) FMV; (2) AR; and (3) Millage.
  • 10. II. FILOT Fair Market Value (FMV): Real Property• Outside of FILOT: Based on assessment by DOR or county assessor• Inside of FILOT: Traditionally, original cost over the life of the FILOT (recent legislation allows for value to be based on appraisal by SCDOR) Machinery & Equipment (M&E)• Generally, same outside and inside FILOT, but if in FILOT not entitled to extraordinary obsolescence.
  • 11. II. FILOT Assessment Ratio:• Outside of FILOT – Manufacturing - 10.5% on both real and personal property (chiefly M&E) – Commercial – 10.5% on personal property and 6% on real property• Inside of FILOT – Down to 6% on both real and personal property – 4% on Super Fees/Enhanced Investment FILOTs
  • 12. II. FILOT Millage:• Outside of FILOT – Millage is set annually. Can actually go down in reassessment years but tends to increase.• Inside of FILOT – Millage is fixed for the life of the FILOT or subject to 5- year rate reset.
  • 13. II. FILOT Advantages of FILOT to Taxpayers: Reduction in Assessment Ratio Elimination of Rollback Taxes (if Real Estate is AG Use) Freezing of Tax Millage Greater predictability in forecasting FILOT payments Super Fee/Enhanced Investment FILOT • 4% AR (verses 6%) • Company has 8 years to meet minimum job and/or investment requirements and can obtain another 5 to complete project for total of 13 years. • If 40-year FILOT payment period is granted, millage can be frozen as to some portion of project for 53 years.
  • 14. II. FILOT Disadvantage of FILOT to Taxpayers: Possible Clawback Freezes the FMV of the Real Property (though now can be unfrozen) Lose Extraordinary Obsolescence Generally, can’t include property previously subject to tax • Limited exceptions • May be addressed through special source revenue credit
  • 15. II. FILOT Advantages of FILOT to County: Eliminate Manufacturer’s Abatement County doesn’t lose first 5 years of property taxes
  • 16. II. FILOTAdditional Notes:• Transfers of FILOT agreements or property under a FILOT – Allowed if pre-approved or subsequently ratified by county – Transferee assumes basis of transferor – IMPORTANT• Affiliates, lessors, and other investors may be able to also benefit.• Amendment of FILOT Agreements – Can NOT lower the millage rate or AR.• Transition to Simplified Fee from other 2 FILOT statutes is allowed.
  • 17. III. Manufacturer’s Abatement• All new manufacturing establishments as well as all additions of at least $50,000.• Abates (exempts) the county portion of the millage for five years for manufacturers – Automatic (County consent NOT required).• Typically between 20% (in a city) and 40% (not in a city) of the millage.• Cities (by Ordinance) may also abate their portion of the millage.• Not available if benefiting from FILOT• Similar abatements available for corporate headquarters, distribution facilities, and R&D facilities. – Corporate HQ and distribution facilities also required to create 75 or more new full-time jobs (or 150 substantially equivalent) in SC.
  • 18. III. Manufacturer’s AbatementExtension of Abatement to Unrelated Purchasers – S.C. Code § 12-37-220(C) and SC Revenue Ruling #04-14• Facility must be acquired in arms-length transaction• Existing facility and # of jobs must be preserved (possibly zero jobs)• County Council must approve• If transferee makes $50,000 or more of additional investment, 5-year period may re-start.
  • 19. IV. FILOT vs Ad Valorem plus Manufacturer’s Abatement Spreadsheet Example
  • 20. V. MCPs/SSRCs/SSRBsMCP - Article VII, Section 13(D) of the SC Constitution:• Counties may jointly develop a MCP with other counties within the geographical boundaries of one or more of the member counties.• The area comprising the MCP and all property having a situs therein is exempt from all ad valorem taxation.• The owners or lessees of any property situated in the MCP shall pay an amount equivalent to the property taxes or other in-lieu-of payments that would have been due and payable except for the exemption herein provided.• Written agreement to share expenses and revenues of the MCP.
  • 21. V. MCPs/SSRCs/SSRBsMCP (Cont.)• Written agreement must include provisions which: (1) address sharing expenses of the MCP; (2) specify by percentage the revenue to be allocated to each county; (3) specify the manner in which revenue must be distributed to each of the taxing entities within each of the participating counties.• If the MCP encompasses all or a portion of a municipality, the counties must obtain the consent of the municipality prior to the creation of the MCP.• All multi-county parks must consist of contiguous counties – passed in 1995.• Relevance? Facilitates provision of special source revenue credits and special source revenue bonds.
  • 22. V. MCPs/SSRCs/SSRBsSpecial Source Revenue Credits (SSRCs)/Special Source Revnue Bonds (SSRBs)• Through the use of a SSRC or SSRB, a county may equalize (or lower) its property tax rate with any other county or state• FILOT agreement not requirement for SSRCs• Typically, presented as a % of FILOT payment or a flat $ amount and applied against FILOT payment due for a defined period of time.• Examples: 25% SSRC for 10 years $50,000 SSRC per year for 20 years 33% SSRC per year until SSRC cap of $250,000
  • 23. V. MCPs/SSRCs/SSRBsSSRCs/SSRBs (Cont.)• Real and personal property are eligible expenditures payable through SSRCs or SSRBs – Traditionally limited to infrastructure and improved or unimproved real estate – SC Economic Development Competitiveness Act of 2010 • If SSRCs/SSRBs used to pay for personal property and personal property is removed from project, must pay taxes for 2 years as to that personal property as if still located at project. • DOR to remit 2 year residual payment. • If SSRC used to pay for both real and personal property or both infrastructure and a personal property, presumed to have been first used for personal property. • Removed personal property can be replaced.
  • 24. V. MCPs/SSRCs/SSRBsSSRCs/SSRBs (Cont.)• Why not just rely on FILOT statute’s provision regarding Infrastructure Improvement Credits? Why bother with a MCP? – Distribution of FILOT Revenues • If not in a MCP – pursuant to pro rata portion of millage • If in MCP – pursuant to MCP Agreement (County has much more flexibility) – Use of FILOT Revenues for Infrastructure Improvement Credit • Limits to portion of revenue received and retained by the County. – In a MCP, amounts due for SSRCs are typically deducted prior to any distribution to taxing entities.
  • 25. V. MCPs/SSRCs/SSRBs Advantages of SSRCs/SSRBs:• Additional decrease of FILOT payments – especially helpful for cash flow in early years.• Hard dollar incentive.• Allows high millage counties flexibility to be competitive.• County can effectively “split” the manufacturer’s abatement with other taxing entities.• Can be drafted precisely to cure specific ills.
  • 26. V. MCPs/SSRCs/SSRBs Disdvantages of SSRCs/SSRBs:• Clawbacks can be severe. – Retroactive or prospective? – Complete or partial? Pro-rata?• Can be difficult to track and calculate.
  • 27. VI. Pollution Control Facilities or Equipment• Complete exemption for facilities or equipment which are designed for the elimination, mitigation, prevention, treatment, abatement or control of internal or external water, air, or noise pollution required by the state or federal government. – Upon request of DOR, DHEC can investigate property and provide DOR with listing of pollution control property. – Dual purpose equipment – production and pollution control – value eligible for exemption is difference between cost of equipment with vs. without pollution control ability. – See S.C. Code § 12-37-220(A)(8)
  • 28. VII. Filing Property Tax Return – Timing Issues for Manufacturers• Special Filing Rules for Manufacturers - SC Code § 12-37-970; SC Revenue Ruling #05-20 – Property Tax Return usually due 4 months after the last day of accounting year Manufacturing Accounting Property Return Due Date Estimated County Billing Dates Final Tax Year Ending Tax Year for Taxes Payment Date 12/31/2011 2012 04/30/2012 Fall 2012 01/15/2013 01/31/2012 2013 05/31/2012 Fall 2013 01/15/2014 02/28/2012 2013 06/30/2012 Fall 2013 01/15/2014 03/31/2012 2013 07/31/2012 Fall 2013 01/15/2014 04/30/2012 2013 08/31/2012 Fall 2013 01/15/2014 05/31/2012 2013 09/30/2012 Fall 2013 01/15/2014 06/30/2012 2013 10/31/2012 Fall 2013 01/15/2014 07/31/2012 2013 11/30/2012 Fall 2013 01/15/2014 08/31/2012 2013 12/31/2012 Fall 2013 01/15/2014 09/30/2012 2013 01/31/2013 Fall 2013 01/15/2014 10/31/2012 2013 02/28/2013 Fall 2013 01/15/2014 11/30/2012 2013 03/31/2013 Fall 2013 01/15/2014
  • 29. VII. Filing Property Tax Return – Timing Issues for ManufacturersManufacturer’s First Year in Business in SC• Required to file a return – as of what date depends on date business begins and date accounting year ends. – Scenario 1 – manufacturer begins business, manufacturer’s accounting year ends • Required to file first property tax return based on assets it holds in SC as of end of accounting year. – Scenario 2 – manufacturer’s accounting year ends, manufacturer’s business begins • Required to file first property tax return based on assets it holds as of end of calendar year.
  • 30. VII. Filing Property Tax Return – Timing Issues for ManufacturersExisting Manufacturer Places Property in Service in SC After end of Accounting Year but Before End of Calendar Year• Manufacturer not required to file another property tax return for property placed in service after end of accounting year.• Advantage to existing manufacturers over new manufacturers
  • 31. VII. Filing Property Tax Return – Timing Issues for ManufacturersMid-Year Sale of Property – Responsibility to File Return and Pay Taxes• Based on (1) seller’s accounting year end, (2) date of sale, and (3) purchaser’s accounting year end• General Rules – For the calendar year of sale, if the seller owns the property as of the close of its accounting year, the seller reports the property for the next property tax year and is liable for the property taxes on the sold property (in some instances, the purchaser is jointly liable for the taxes on that property). – For the calendar year of sale, if the seller does not own the property as of the close of its accounting year but the purchaser does own such property as of the end of its accounting year, the purchaser reports the property for taxation and is liable for the taxes on that property for the next property tax year. – For the calendar year of sale, if neither the seller or the purchaser own the property as of the end of their accounting years for the calendar year of sale, then the manufacturer that owns the property on December 31st of that year, must report the property and is liable for property taxes on that property for the next property tax year.
  • 32. VII. Filing Property Tax Return – Timing Issues for ManufacturersMid-Year Sale of Property (Cont.)• Revenue Ruling discusses 6 scenarios – Transitional Property Tax Year • Scenario 1 - the seller’s accounting year ends, the sale occurs, the purchaser’s accounting year ends. • Scenario 2 - the seller’s accounting year ends, the purchaser’s accounting year ends, the sale occurs. • Scenario 3 - the purchaser’s accounting year ends, the sale occurs, the seller’s accounting year ends. • Scenario 4 - the sale occurs, the seller’s accounting year ends, the purchaser’s accounting year ends. • Scenario 5 - the sale occurs, the purchaser’s accounting year ends, the seller’s accounting year ends. • Scenario 6 - the purchaser’s accounting year ends, the seller’s accounting year ends, the sale occurs. – Scenarios 1 and 2 – seller required to file return; purchaser jointly liable for taxes due. – Scenario 3 – no responsibilities of seller; purchaser must file 2 returns – 1 as of end of accounting year and 1 for purchased property as of 12/31 (assuming ownership) – and is liable for taxes. – Scenarios 4 and 5 – no responsibilities of seller; purchaser required to file return and pay taxes. – Scenario 6 – seller required to file return and pay taxes; no liability to purchaser.
  • 33. Nexsen Pruet Tushar V. Chikhliker Member Nexsen Pruet, LLC T: 803-253-8261 F: 803-727-1469Tushar@nexsenpruet.com www.nexsenpruet.com