Tuesday, August 30, 2011
Most states have economically depressed areas, usually urban but sometimes rural. Politicians want to encourage businesses to locate in those areas (more jobs, more votes). So they offer sales and use tax exemptions as incentives. They also often offer non-sales tax incentives, like income tax and property taxes. But I think I'll just talk about the sales and use tax piece, if you don't mind. Enterprise zone is the generic name for this exemption, and most states call it by some variation of that term.
Interestingly, this is about the only exemption that is based on where an item is purchased, sold, or used.
The incentives usually include some mix of the following exemptions, depending on the state:
No sales and use taxes on purchases of building materials used inside an enterprise zone.
No sales and use taxes on any purchases to be shipped to and used in the enterprise zone.
No sales taxes on items sold in the enterprise zone by a business in the zone.
There are usually some mix of the following restrictions, depending on the state:
Companies receiving the exemptions have to meet employment and/or investment targets.
Companies can't simply move from one part of the state to the enterprise zone, causing growth in the enterprise zone and loss in the former location of the business.
The seller AND the buyer have to be located in enterprise zones, but not necessarily the same one.
Companies have to register with and get prior certification from the economic development agency du jour.
The exemption is available for local taxes only.
The sales may not be exempt. But the company can apply for a refund or credit.
Zones have expiration dates.
The certifications of businesses in the zones have expiration dates.
Some states have a variety of different types of zones with different rules. For example, Pennsylvania has: Keystone Opportunity Zones, Keystone Opportunity Expansion Zones, Keystone Improvement Zones and First Class City Improvement Zones. Sheesh.
Why I hate Enterprise Zones (warning, you're entering the "editorial zone")
1. Politicians want private companies to do something, like set up businesses in blighted areas.
2. So they write tax exemptions encouraging that.
3. But they want to make sure those sneaky businesses don't make TOO much money in tax savings, nor abuse the exemption.
4. So they add nuttier and more complicated restrictions into the rules. Notice that I wound up listing a whole lot more restrictions above then actual exemptions.
5. Politicians also appear to be too lazy to just update the rules for a zone. They have to write new ones piling on the old ones (see Pennsylvania above).
6. Businesses that might move into the area look at the rules, sigh, and say, "never mind." Therefore these enterprise zones don't accomplish what the politicians wanted and promised.
What you should do
Check to see if your company, or any of your vendors or customers, are already located in an enterprise zone. In other words, are there exemptions available to you that you weren't aware of?
Factor any tax exemptions into your expansion plans.
Make sure you understand the rules clearly before taking action.
Get a professional to assist with this if the rules are as complicated in your state as I've implied.
Get a professional anyway. If you're making business decisions based on some system a politician has set up, you want to make sure you do it right.
The Sales Tax Guy
See the disclaimer - this is for education only. Research these issues thoroughly before making decisions. Remember: there are details we haven't discussed, and every state is different. Here's more information
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