From 2007

HB 2322 Summary

Tax Credit Accountability; Motion Picture

Sponsors: Representative Reagan, Representative Kirkpatrick, Representative Konopnicki et al

HB 2322 modifies the motion picture production tax incentive program by providing that 5% of the credits be used for commercials and music videos. Also establishes a new managed audit program within Department of Revenue (DOR) for ease of transferability of these credits, adds new income tax credits for infrastructure projects under the existing caps for soundstages and support facilities and   restructures the amount of credit a motion picture production can receive.  Allows Department of Commerce (DOC) to use $180,000 of credit amount for 2 FTEs to administer the program.

History

The Motion Picture Production Tax Incentive Program (MPPTIP) was established by the Arizona State Legislature in 2005 in order to promote and stimulate the motion picture industry in Arizona.  The program became effective on December 31, 2005 and will remain in effect through December 31, 2010. 

To qualify for the program, the motion picture production company must be primarily engaged in production of motion pictures, have a physical office and bank account in Arizona, invest at least $250,000 in qualifying production costs in a twelve-month period, and employ the statutory required percentage of Arizona residents during production.  For 2007, 35% of the company’s full-time employees must be Arizona residents and in 2008, 50% of the full-time employees must be residents. Additionally, the company must apply and be pre-approved by the Department of Commerce (DOC) in order to participate in the MPPTIP.  DOC will then issue a letter of qualification and transmit a copy to the Department of Revenue (DOR) who will verify the company’s eligibility and issue a certificate of exemption to the motion picture company.

Transaction Privilege and Use Tax Exemption

Transaction privilege tax (TPT) is a tax on the right to conduct business in Arizona.  Use tax is similar to TPT but is charged specifically on purchases made out of state but used in state.  The MPPTIP provides an exemption from TPT and use tax for a) construction contracts for buildings or other structures, b) sales of catered food, drink and condiments, c) the lease or rental of lodging space, d) job printing, embossing, engraving and copying, and d) machinery, equipment and other tangible personal property.  In order to use the TPT and use tax exemption, the motion picture company must show the vendor their certificate of exemption.

Individual and Corporate Income Tax Credit

The amount of the credit is provided in the following table:

Cost of Production	Income Tax Credit (based on cost of production)
$250,000 - $1,000,000	10%
$1,000,001 - $3,000,000	15%
more than $3,000,000	20%

 

The DOC may not pre-approve more than $5M worth of credit for a single motion picture application.  Furthermore, in any given year the total amount of tax credits approved is capped as follows:

 

Provisions

Department of Commerce (DOC)

Commercial advertisements & music videos:

·          Beginning with the 2008 income tax credit allocation, 5% of the amount must be set aside for commercial advertisements and music video productions.

·          The amount of the income tax credit for commercials and music videos is determined in the same manner as other productions, based on the cost of the production (see chart below). 

·          Commercials and music videos will be allocated the tax incentives based on the date the applications are filed and the estimated total expenditures in this state.

·          DOC must review requests for commercials and music videos qualification within fifteen business days (instead of 30 days for movie productions).

·          DOC will issue income tax credits to a certified production company for commercials and music videos when the expenditure of the minimum threshold amount ($250,000) is reached within 12 months.  If updates are submitted on the application of income tax credits, the credit amount will be adjusted as additional expenditures are occurred. 

·          Requires DOC to adopt rules for qualifying commercial advertisements and music video productions for tax incentives and to prescribe necessary forms and procedures. 

General motion picture production:

·          Changes current law requiring that a motion picture production company (MPPC) must incur at least $250,000 for producing one or more motion picture productions and instead requires the expenditure of this amount for each motion picture production.

·          DOC will apply the preapproved amount of credits against the cap in the year in which the application was submitted. 

·          DOC will reallocate any income tax credits that are voluntarily relinquished or that lapse because the expenditure requirements were not met and count the reallocation of the income tax credits against the original credit year allocation amount. The reallocated amounts will be assigned to other MPPCs that applied or to any MPPC that successfully appeals a denial of approval. 

·          Beginning with the 2006 tax credit allocation, requires that an approved credit must first offset the tax liability for the taxable year for which the credit was originally allocated, if there is any remaining credit, it can be used as a carry forward to offset future taxes as allowed under current law. 

·          Changes the amount of credit allowed for any one motion picture production based on costs of production in Arizona as follows:

 

Current Program: Income Tax Credit Amount based on production costs	HB 2322 changes to Income Tax Credit Amount based on production costs
$250,000 - $1 M – 10%	$250,000 - $1M: 20%
$1 M - $3 M – 15%	$1M and over – 30%
$3 M and over – 20%

 

 

 

 

·          Changes the maximum credit amount for any one motion picture production (currently capped at $5 million).  The new caps are: $5 million in 2007; $7 million in 2008; $8 million in 2009 and $9 million in 2010 and subsequent years (if any).

·          Currently, DOC is prohibited from approving tax incentives for obscene productions.  If a motion picture production company adds subject matter that violates the obscenity prohibition, then any income tax credits must be repaid to DOR, and DOR may draw upon any letter of credit that was issued with the original application to DOC.

·          Requires DOC to contain in its annual report on motion picture production credits:

·          The name of each MPPC or applicant and the amount of income tax credits preapproved for each production or infrastructure project.

·          The amount of credits approved for each production.

·          Beginning in 2008, the prequalification letter from DOC is effective for 24 months instead of 12 months.

·          All references to requalification are removed and are no longer permitted.  MPPCs will have 24 months instead of 12 months to qualify.

·          The aggregate credit program caps remain the same, but a new credit for infrastructure projects is permitted under the existing caps. 

Infrastructure Projects Tax Incentives:

·          Beginning October 31, 2007 through December 31, 2010, DOC is required to certify motion picture infrastructure projects for income tax credit purposes.  This includes soundstages and support and augmentation facilities.

·          The maximum credit amount is 15% of the total base investment and the program credits are capped at the following amounts:

 

SOUNDSTAGES	ASSOCIATED SUPPORT & AUGMENTATION FACILITIES
2008:  $5 M	2008:  $0
2009:  $5 M	2009:  $7 M if at least 1 soundstage project was certified in 2008
2010:  $5 M	2010:  $9 M if 1 or more soundstage projects were certified in 2008 or 2009

 

·          Caps the maximum credit for each support and augmentation facility to $3 million.

·          The applicant is the person who owns and operates the infrastructure project.  Qualification provisions are prescribed.

·          Minimum expenditure requirements to qualify for the for infrastructure projects are:

·          For soundstages:

·          $250,000 in Arizona within 90 days of preapproval.

·          An additional $1 million in Arizona within 12 months of preapproval.

·          A total of at least $5 million in Arizona within 36 months of preapproval.

·          For support and augmentation facilities:

·          $250,000 in Arizona within 90 days of preapproval.

·          A total of $1 million in Arizona within 36 months of preapproval.

·          DOC will approve applications based on the date of the initial application and the availability of tax credit amounts.

·          On completion of the project, the applicant will apply for approval of the credits from DOC.  If approved, DOC will notify DOR of the amount of the credit.

·          Preapproval lapses if the company fails to provide documentation of the required expenditures in this state within specified time limits.

·          On completion of the project, a preapproved applicant must apply to DOC for approval of the income tax credits.  DOC will notify DOR of the approved credit amounts.

·          Within 18 months after postapproval, the applicant must submit a report to DOC listing the activities and productions conducted at the project in the 12 months following postapproval, the amount of any additional capital investments and any changes or improvements.  If the company fails to report, they may be disqualified from receiving future tax credits.

·          If a person that receives a tax credit fails to comply with any provisions within 60 months of postapproval, then DOC shall terminate the credit approval and require the credits to be recaptured, along with a penalty.

·          All information gathered by DOC from the applicants is considered confidential information.

·          Defines terms associated with this new credit.

 

Commercial Advertisements & Music Video Production Companies

·          Exempts commercials and music videos from the requirement to submit a script and instead requires a synopsis or story board that identifies: 

·          The product, service, person or event for a commercial

·          The artist and song for the music video

·          A description of the general content or message

·          The location(s), the sets and the intended distribution or broadcast medium and specific channels, if known.  

·          Within 60 days of filing the application, if the production company is approved for a given production, they must notify and provide documentation to DOC of the total amount of eligible production costs.  The production company may apply for qualification before the minimum threshold is reached, however, income tax credits will not be approved until the eligible production expenses reach the threshold within 12 months.

·          Any expenses incurred before the date of the completed application do not qualify as production costs.

·          Current law allows DOC to accept applications after October 31 each year for the next year’s income tax credits if the current year maximum allocation is reached.  This does not include commercials and music videos and specifically requires that DOC can only accept applications for these in the calendar year in which the credits would be allocated.

·          Allows still photography used in a national or international print media to qualify as a commercial advertisement.

 

Television Series

·          Exempts television series from the script requirement, except for a pilot program, and replaces it with a requirement for the following information:

·          A synopsis of the general nature of the series.

·          A description of the characters, their interactions with each other, the locations and sets.

·          The intended distribution or broadcast medium, including specific channels if known.

·          Includes a television pilot as part of a television series

 

Motion Picture Production Companies (MPPC)

·          Clarifies that only a MPPC that has the lawful right to produce any given production is eligible to apply for tax incentives.

·          Clarifies that the initial application for tax incentives must be signed by the producer(s) of the motion picture as stated in the credits of the film.

·          An application is void and tax incentives are rescinded if the MPPC does not begin production within 90 days (instead of four months) of preapproval.   This requirement is modified to also require that the MPPC must provide documentation of either:

·          Expenditures of at least 10% of its total budget or $250,000.

·          A completion bond for the production was preapproved. The completion bond must be equal to the estimated total budget of the production and defines completion bond.

·          A MPPC may voluntarily give up all or part of their credit allocation before the expiration of the initial preapproval period. 

·          If a preapproved MPPC fails to begin production as required and does not voluntarily relinquish the unused credit amounts, then all signatories to the preapproval application are disqualified for three years from participation in any production that applies for and receives tax incentives.

·          Allows a MPPC to apply for approval to DOC before a viewable copy of the production is available if they submit a letter of credit with their application.  The letter of credit must be payable to DOR.

 

Department of Revenue (DOR)

·          Allows DOR to enter into a limited managed audit agreement with a MPPC or applicant to certify the amount of production costs or the base investment for infrastructure projects and confirm the amount of credit allocated by DOC. 

·          If DOR accepts the limited managed audit and the MPPC or applicant files a timely Arizona income tax return with a claim to the credits, the credit amount is not subject to recapture, disallowance, reduction or denial. 

·          DOR will issue a Notice of Determination stating the amount of the credit and that it is not subject to recapture.  The determination is valid for the MPPC, the applicant or any transferee of the credit. 

·          The income tax credits may only be recaptured if the MPPC or applicant failed to disclose material information during the audit or falsified records. 

·          The limited managed audit agreement must:

·          Be paid for by the MPPC or applicant.

·          Be conducted by an independent certified public accountant, not affiliated with the MPPC or applicant.

·          Establishes new individual and corporate income tax credits for infrastructure projects under the existing caps.  (See DOC section for details)

·          The amount of the credit is 15% of the total base investment during the taxable year as approved by DOC.

·          DOR shall not allow tax credits for any taxpayer who has a delinquent tax balance or that would exceed the aggregate caps.

·          Allows the credit to be prorated among the owners of the project and the credit may be carried forward for five years.

·          Allows the credits to be transferred in the same manner, and subject to the same conditions, as the motion picture production credits.

·          The credits cannot be claimed if these expenses are claimed as a deduction on the federal return.

·          Requires DOR to maintain data on credit amounts and provide that information to doc on request.

·          Provides a purpose clause for the credits and adds the credits to the income tax credit review schedule for 2010.

 

Miscellaneous

·          Defines commercial advertisement, music video and televisions series.

·          Modifies the current definition of motion picture to exclude any locally broadcast television productions, including news, weather, sports, games shows, etc.

·          Modifies the definition of motion picture production company to include production company, including production of commercial advertisements and music videos.

·          Subject to legislative authorization, allows $180,000 of the income tax credit amount each year to be allocated to doc for up to two FTEs dedicated solely to the administration of the motion picture and infrastructure credits.  Provides session law for the authorization of this amount for FY 2007-2008.  If the program terminates, the two new positions for this program are also terminated.

 

 

 

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Forty-eighth Legislature

First Regular Session  2          May 22, 2007

 

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