Application and Sale of Restricted Tax Credits

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The Pennsylvania Department of Revenue has issued detailed rules for the application and sale of various Pennsylvania tax credits.  Corporation Tax Bulletin 2014-04 replaces Corporation Tax Bulletin 2011-03.  The Bulletin covers the Research and Development Tax Credit, the Film Production Tax Credit, the Neighborhood Assistance Program Tax Credit, the Resource Enhancement and Protection Tax Credit, the Keystone Innovation Zone Tax Credit, the Keystone Special Development Zone Tax Credit, and the Historic Preservation Incentive Tax Credit.

 

Bulletin 2014-04 lists application deadlines for the various credits, as well as the taxes to which the credits may be applied, the carry forward period, the purchaser’s liability offset limit (percentage of the purchaser’s tax that may be offset by a purchased tax credit) and the waiting period, if any, before a tax credit may be sold.  All of the tax credit programs require that an approved credit be applied first against the tax liability for the period in which the credit is approved.  The unpaid tax liability for that period must be satisfied before any portion of a credit can be carried forward to future years, sold or passed through to the shareholders, members or partners of a Pennsylvania S corporation, limited liability company or partnership.

The Department will apply restricted credits before any cash payments.  Taxpayers who are required to make quarterly estimated payments may use restricted tax credits to satisfy a quarterly liability.

Companies that qualify for any of the specified tax credits, or are considering purchasing tax credits from another taxpayer, should refer to the Department’s Bulletin for more detailed information.

One of the more interesting issues under Pennsylvania real property tax law is what constitutes an “industrial establishment,” entitled to exclusion from taxation as real property under 72 P.S. Section 5453.201(a), of the Fourth to Eighth Class County Assessment Law.  This Section reads as follows:

Machinery, tools, appliances and other equipment contained in any mine, mill, manufactory or industrial establishment shall not be considered or included as a part of the real estate in determining the value of such mine, mill, manufactory or industrial establishment.

In 2011, the General Assembly of the Commonwealth of Pennsylvania merged the Fourth to Eighth Class County Assessment Law and the Second Class A and Third Class County Assessment Law into the Consolidated County Assessment Law, 53 Pa.C.S.A. Section 8801 et seq.  The above-cited statute was reenacted in substantially the same form at 53 Pa.C.S.A. Section 8811 (b)(1).

BFC Hardwoods Inc. v Board of Assessment Appeals of Crawford County, 771 A.2d 759 (Pa. 2001), was the first Pennsylvania Supreme Court decision to discuss this statute in detail.  Other cases had dealt with equipment located in mills and factories but none had explored the meaning of equipment located in an “industrial establishment” since the passage of the Act.

The facts of this case are complex because of the industrial process involved.  BFC Hardwoods, Inc. was in the business of drying lumber in five specialized kilns known as “dry kilns.”  The Crawford County Board of Assessment Appeals assessed the kilns as taxable and refused to apply the above exclusion.

The kilns were used continuously and exclusively to remove moisture from pre-cut lumber to a greater degree than could be done by conventional open-air drying.  This process made the wood suitable for commercial sale and use in a broad range of applications.

The facility included large insulated physical structures into which lumber was stacked for substantial time periods. High capacity heating systems were used to heat the lumber and draw moisture from the wood.  Exhaust ventilation systems were designed to control airflow and eliminate saturated air from the enclosed structures.  The dry kilns possessed additional specialized features including computer controls, monitoring equipment, interior skins of aluminum alloy, concrete flooring to support the heavy load, loading doors designed as movable walls and equipped to be hermetically sealed, system of fans integrated into false ceilings and bulkheads and baffles used to direct airflows.  The ovens were assembled on the property from pre-manufactured, pre-drilled components which could be disassembled for purposes of relocation.

The dry kilns lacked conventional services such as running water, sewage or heating.  The taxpayer’s expert testified that these kilns had no other use and were not suited to applications other than drying lumber.   The BFC facility consisted of these ovens, storage buildings, an office and undeveloped real estate.

On appeal to the Crawford County Court of Common Pleas, the decision of the assessment board was affirmed.  The lower court held that the dry kilns were not excluded from taxation because they were not contained in any “mill, manufactory or industrial establishment” and that the business of kiln drying did not meet the definition of “manufacturing” or “processing” in the Capital Stock Tax Act, 72 P.S. Section 7601-7606.  The Pennsylvania Commonwealth Court affirmed the lower court in a memorandum opinion and allowance of appeal to the Pennsylvania Supreme Court was granted.

BFC argued the dry kilns qualified for exclusion because they were machinery contained in an “industrial establishment” and they were directly employed to accomplish a form of industrial processing.

The Pennsylvania Supreme Court stated that in order to qualify for this exclusion from taxation the following two requirements must be met:  (1) the property at issue must constitute machinery, tools, appliances, or other equipment; and (2) the property must be contained in a “mine, mill, manufactory or industrial establishment.”

In meeting these tests BFC contended that its facilities were an “industrial establishment.”  The Court agreed and stated:

Beginning with the latter of these criteria, while BFC does not purport that its facilities should be deemed to be a mine or mill and does not press the assertion that they constitute a “manufactory” its essential position is that the facilities do constitute an “industrial establishment.”  In defining this term, this Court has applied an approach emphasizing general usage and understanding.  See, e.g. North Side Laundry Co. v. Board of Property Assessment Appeals and Review, 366 Pa. 636, 79 A.2d 419 (1951) (stating that the law can do no better than define an industrial plant as that establishment which the ordinary man thinks of as such).  Under this approach, the Court has determined, for example, that a commercial laundry is an industrial establishment, see id.; United Laundries, Inc. v. Board of Property Assessment Appeals and Review, 359 Pa. 195, 58 A.2d 833 (1848), and the intermediate appellate courts have concluded that newspaper plants and TV stations also would qualify.  See, e.g. Messenger Publishing Co. v. Board of Property Assessment, Appeals and Review, 183 Pa. Super 407, 132 A.2d 768 (1957) (endorsing the view of the common pleas court to the effect that it would seem that the ordinary man would think of a newspaper as an industrial plant, especially if one were to tell him that a laundry or carpet cleaning company are such for purpose here being considered.); City of Pittsburgh v. WIIC-TV, 321 A.2d 387 (Pa.Cmwlth. 1974) (stating that the same ordinary man would think of a TV station as an industrial establishment, especially if one were to tell him that a newspaper plant is such for the purpose being considered).

The Pennsylvania Supreme Court specifically found that BFC employed large-scale specialized implements to cause a substantial change in quantities of lumber by removing moisture more efficaciously than would be possible naturally and that its operation constituted an “industrial establishment,” meeting one of the requirements of Section 201(a).  The Court then found that the modern concept of machinery is effectively the apparatus essential to actual industrial operations and that a broad construction was consistent with the legislative policy of fostering business development in the Commonwealth.  The Court found that the taxpayer met the second prong of the exclusion test and held that the BFC dry kilns constituted machinery and therefore the ovens were excluded from taxation.

It should be pointed out that the Court summarily disposed of the argument that the restrictive definition of manufacturing in the Capital Stock Tax Act was controlling.  The Pennsylvania Supreme Court stated in this regard:

We agree with BFC that the decision is distinguishable as defining a set of exclusions for purposes of capital stock taxation crafted more narrowly than the exclusion prevailing under the Law for purposes of local real estate taxation.

In order to qualify for this exclusion from taxation a taxpayer is required to meet a two prong test promulgated by the Pennsylvania Supreme Court i.e. the property at issue must constitute machinery, tools, appliances, or other equipment, and the property must be contained in a mine, mill, manufactory or industrial establishment.  Pennsylvania originally enacted this provision to help the Commonwealth attract new industrial business establishments and retain existing ones.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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