Pine Tree Zones should not be overlooked

Merrill Barter, Managing Director, Tax Practice

The following article originally appeared in Mainebiz.

As noted in the Feb. 6 issue of Mainebiz, Maine again received a very poor ranking for its business tax climate. Specifically, it ranked 37th in the annual report by the Washington, D.C.-based Tax Foundation. However, this does not mean the state lacks some valuable tax incentives for businesses. One of the more significant incentives is Maine’s Pine Tree Development Zone program.

The PTDZ program is comprised of several tax incentives that offer Maine businesses in eligible sectors the opportunity to greatly reduce, or possibly eliminate, state taxes for up to 10 years. The goals of the PTDZ program are to create quality jobs in targeted business sectors and to support new and expanding businesses in Maine and businesses relocating here.

Lately, Maine’s tax policy has been widely publicized and criticized in the news. Two articles recently published by the Maine Center for Public Interest Reporting were highly critical of the PTDZ program and questioned the need for it and many other incentives. A significant portion of one article was devoted to questioning whether the “but for” criteria (detailed below) were met by successful applicants. The other lamented the lost revenue resulting from tax breaks like the PTDZ. One must realize, however, that the legislative intent of this program is to provide incentives to businesses in Maine to stay here, create new jobs and attract more business to the state. If we fail to do that, the lost revenues and opportunities may be immeasurable. An appropriate approach is not to dismantle the PTDZ, but to retain, supplement and expand it. If the “but for” language is problematic, let’s consider eliminating that requirement.

How to apply

To take advantage of the PTDZ program’s benefits, an eligible business must apply to the Maine Department of Economic and Community Development for certification. Some municipalities in Cumberland and York counties are designated as Tier 2 municipalities, and qualifying businesses located there will be eligible for five years of benefits. Qualifying businesses located in the rest of the state are eligible for 10 years of benefits.

The application process is fairly straightforward, but prior to any public announcement of the development project, the business should submit a “but for” letter. This letter should provide an overview of the project, including the estimated capital expenditure and new jobs to be created, and should contain a statement that the development project “would not occur within the state but for the availability of the Pine Tree Development Zone benefits.”

Once certified, the business must add at least one net new quality job to obtain benefits (other than Employment Tax Increment Financing, as discussed below). A quality job must meet income requirements as set forth by the DECD, and include access to group health insurance and group retirement benefits.

Benefits

A significant PTDZ benefit is an income tax credit of 100% in years one through five for Tiers 1 and 2, and an additional 50% in years six through 10 for Tier 1 businesses. The credit is computed based on the net new PTDZ property and payroll as a percentage of all Maine property and payroll. Therefore, a business that was certified from inception would pay no income tax in years one through five. The income tax credit can offset corporate and individual income tax (for businesses structured as flow-through entities).

For businesses that create a minimum of five net new quality jobs within a two-year period, the Employment Tax Increment Financing is another valuable benefit. This incentive provides a reimbursement of 80% of their new employees’ state income tax withholding for 10 years (five years for Tier 2 businesses). If a PTDZ-certified business is labor-intensive (requiring a large number of employees), and/or employs highly skilled (and therefore higher paid) employees, the positive cash flow impact of this incentive can be significant.

Other benefits include a 100% sales and use tax exemption for personal and real property used in the PTDZ activity. A significant non-tax benefit of the program is access to reduced electricity rates.

Example

Let’s assume that a precision manufacturing business relocated from Massachusetts to a Tier 1 municipality, and began operations on Jan. 1, 2011. The business is structured as an S corporation, has 30 full-time, qualifying employees earning total wages of $2 million, and total Maine income tax withholding of $80,000. As an established business, the entity had $1 million of taxable income in 2011. The following tax incentives would be realized under the PTDZ program:
The ETIF reimbursement would be 80% of the Maine withholding: $64,000.
The shareholders would receive a Maine tax credit to offset 100% of the tax attributable to the business: a benefit as high as $85,000 (assuming the top marginal tax rate of 8.5%).

In the example above, the entity and its shareholders enjoyed benefits totaling $149,000, before consideration of sales tax benefits and reduced electricity costs.

Maine’s tax structure, and its impact on attracting businesses, is much more favorable than it seems at first glance. Business decision makers should evaluate state incentives. More information can be found at maine.gov/decd.

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