Background
The District provides a variety of tax benefits to QHTCs, including sales and use tax1 and personal property tax exemptions,2 as well as a reduced corporation franchise tax rate.3 In order to qualify as a QHTC, a business must:
- Be an individual or entity organized for profit;
- Lease or own an office in the District;
- Have two or more qualified employees within the District;
- Derive at least 51% of its gross revenues earned in the District from certain high technology-type activities; and
- Be registered with the District Government as a business.
Previously, to obtain QHTC benefits each year, the Office of Tax and Revenue (OTR) required QHTCs to attach to their tax returns or claims for refund a QHTC-CERT form. The QHTC-CERT form is a certification that the taxpayer meets all of the conditions required of a QHTC.5
Online Application of QHTC Certificate of Benefits
Effective January 4, 2019, OTR amended D.C. Mun. Regs. tit. 9, § 1101, Benefit Applications for Qualified High Technology Companies. QHTCs must now self-certify and obtain a certificate of benefits each year. The application can be found at https://mytax.dc.gov.
The Certificate of Benefits must be obtained prior to or concurrently with the filing of the return on which the QHTC claims the benefits. It is not necessary to attach the Certificate of Benefits to the return, though. Instead of reviewing the applications in detail when filed, OTR auditors may audit the QHTC’s qualification during normal audit processes.
The Certificate of Benefits application is similar to the application OTR has required, beginning November 1, 2017, for a QHTC to receive the FP-337 Exempt Purchase Certificate. The FP-337 is used for QHTCs to purchase sales and use tax exempt software, hardware, and equipment. For more information, see Legal Alert: DC Office of Tax and Revenue Launches New QHTC Sales and Use Tax Exemption Application/Pre-Certification Process.
The application requirements include the following:
- Identifying Information: Taxpayer ID, name, address, sales tax account number, NAICS code, and an explanation of principal business activity;
- Financial Information: Gross revenue, gross revenue earned from QHTC activities within the District, and the amount of QHTC exempt sales and purchases from the prior year, by month;
- Documentation of District Office and Employees: Proof of a District office location, such as a lease agreement or proof of ownership, and proof of at least two District employees, such as a copy of the previous quarter’s unemployment report; and
- Job Creation Information: The number of QHTC jobs created, and the number of QHTC employees hired who are District residents.
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Eversheds Sutherland Observation: The job creation information may be related to the recent review of the QHTC program by the Office of Revenue Analysis (ORA). In November 2018, the ORA published its analysis of the program,6 along with its conclusion that the QHTC incentives could be better targeted to achieve the program’s goals. The ORA suggested that the District: (1) require more than 51% of a firm’s District business activities be QHTC activities; (2) cap the total amount of tax benefits; (3) implement a clawback provision for firms that leave the District within a certain number of years; (4) continue to collect data on QHTCs; and (5) publicly release the company names and QHTC incentive amounts for each QHTC.
Eversheds Sutherland expects that OTR will revise its FR-399, Qualified High Technology Companies booklet this year to provide taxpayers with further guidance.
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1 See D.C. Code Ann. §§ 47-2001(n)(2)(G), 47-2005(31); D.C. Mun. Regs. tit. 9, § 1111.
2 See D.C. Code Ann. § 47-1508(a)(10); D.C. Mun. Regs. tit. 9, § 1112.
3 See D.C. Code Ann. § 47-1817.06.
4 See D.C. Code Ann. § 47-1817.01(5)(A); FR-399, Qualified High Technology Companies, D.C. Office of Tax & Revenue (rev. Aug. 2017).
5 FR-399, Qualified High Technology Companies, at p. 1, D.C. Office of Tax & Revenue (rev. Aug. 2017).
6 Review of Economic Development Tax Expenditures, Office of Revenue Analysis (issued Nov. 2018), available at https://cfo.dc.gov/sites/default/files/dc/sites/ocfo/publication/attachments/2017%20Economic%20Development%20Tax%20Expenditures%20121918.pdf.
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