Sales Tax Slice: Spotlight on Sales Tax Savings in Enterprise Zones


construction

Last month, Wisconsin introduced its first enterprise zone that includes sales and use tax exemptions.[1] Though limited in scope (applying only to building materials for “the construction or development of facilities located in an electronics and information technology manufacturing zone”), its creation serves as a reminder of the influence that enterprise zones wield in attracting business.[2] States have used tax incentives of nearly every kind and combination to grow jobs and draw investment into these traditionally economically-challenged areas. When sales tax incentives are used as a tool, they generally come in the form of a tax reduction, exemption, or credit/refund.

Enterprise zones vary widely across states, and not just in size. Wisconsin’s enterprise zones are particularly unique in that they do not “target regions or areas of the state, only single companies,” according to the Journal Sentinel. New Jersey’s Urban Enterprise Zone Program, on the other hand, is representative of a more conventional approach. It offers a reduced sales tax rate for qualified businesses within specific geographic areas of 3.4375 percent, which is half the current rate.

Though designed to attract business, gaining entry to these zones isn’t always easy. In some cases, both the entity and geographic area itself must apply for zone status. Georgia mandates that an area meet at least three of five criteria in order to be designated an enterprise zone. This includes demonstrating “pervasive poverty” using federal census guidelines; an unemployment rate 10 percent higher than the state average; “general distress” evidenced by adverse conditions such as high crime and abandoned buildings; and “underdevelopment,” using growth activity data such as business license and building permit issuance.[3] Mississippi’s Growth and Prosperity Program requires participating counties to either have an unemployment rate that is "200 percent of the state’s annual unemployment rate” or demonstrate “30 percent or more of its population [is] below the federal poverty rate.”

States’ certification criteria for the business or "enterprise" applying for these programs often require that a minimum number of jobs be created by the business. For example, Mississippi’s program participants must create 10 or more jobs. New York has previously determined this number using its own “employment test” formula.

Further narrowing access to enterprise zones, some states have limited application windows. Continuing with New York as an example, the Qualified Empire Zone Enterprise program has famously been closed to new participants since 2010. Those who registered early enough to be certified before the deadline, however, will continue to enjoy sales tax exemptions (in the form of refunds) for up to 120 months after their certification.

Many states also use enterprise zones to promote specific industries. Manufacturing in particular is one such industry that is heavily incentivized. For example, Colorado exempts purchases of machinery or machine tools in excess of $500 if used solely and exclusively “in a manufacturing process carried on in a Colorado enterprise zone.”

Another common enterprise zone program sponsored by states involves tax breaks for construction projects. Although these provisions may not specify what industry or sector the newly constructed buildings must service, they do tend to include restrictions. Minnesota’s Border-Cities Enterprise Zone Program, which provides sales tax credit for purchases of construction equipment and materials, specifically excludes recreation and entertainment facilities from its program.

While some states have opted to phase out their programs in recent years, new ones, like Wisconsin’s, are still popping up—likely indicating that they aren’t going anywhere anytime soon.

Continue the discussion on Bloomberg BNA's State Tax Group on LinkedIn: How can enterprise zone programs be improved?

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[1] Wisconsin previously offered sales and use tax credits against income tax in enterprise zones between 1998 and 2009. See former Wis. Stat. §§ 71.07(2ds), 71.28(1ds), 71.47(1ds) (2014).

[2] 2017 Wisc. A.B. 1 created this zone as part of the deal to secure the Foxconn manufacturing plant in the state.

[3] Ga. Code Ann. § 36-88-6.