Could a qualifying Rhode Island shipyard claim the ten-percent investment tax credit for leased drydock and shipbuilding equipment in 2002?

Plain-English summary

Company X qualified for Rhode Island's ten-percent investment tax credit on leased drydock and shipbuilding equipment in 2002. The property met the statutory requirements, and the Rhode Island Department of Labor and Training had issued the required wage certification.

Company X operated a Rhode Island shipyard that designed, constructed, repaired, and overhauled ocean-going barges and shallow-draft vessels. It was classified as a manufacturer in SIC major group 37, subgroup 3731, and NAICS code 336611.

The company leased various equipment beginning at the end of 2001 and leased a drydock beginning in September 2002. Both were tangible personal property located in Rhode Island. The company estimated a ten-year useful life for the equipment and a twenty-year useful life for the drydock, and it had end-of-term purchase rights.

The credit applied to qualifying tangible property acquired after January 1, 1998 that was depreciable under federal law, had a useful life of at least four years, was acquired by a qualifying purchase or lease, had Rhode Island situs, and was used by a qualified taxpayer in a listed industry.

For the manufacturing-industry wage test, the Department of Labor and Training determined that Company X's average annual production-worker wage exceeded the statewide average for production workers sharing its two-digit SIC code. The agency issued the certification for the year ending December 31, 2002.

Because the drydock and equipment were leased rather than purchased, the credit was not based on the full fair market value. The ruling calculated the base as fair market value at lease inception multiplied by the fraction of the property's depreciable life represented by the lease term, excluding renewal options.

What this means for you

Manufacturers leasing equipment

Leased property could qualify on these facts, but the credit base was prorated. Document the inception fair market value, lease term, renewal options, and depreciable useful life.

Shipyards and heavy-industry operators

Industry classification, Rhode Island location, property use, and minimum useful life were all part of the qualification analysis.

Payroll and tax teams

The wage certification was essential. The ruling relied on the Department of Labor and Training's finding that production-worker wages exceeded the relevant statewide industry average.

Common questions

Did leased equipment qualify for the credit? Yes. The statute and ruling allowed qualifying leased tangible property.

What property was covered? The leased drydock and shipbuilding equipment located at the Rhode Island shipyard.

Was the full fair market value used? No. Fair market value at lease inception was prorated by the lease term's share of the property's depreciable life, excluding renewal options.

Did useful life matter? Yes. Qualifying property needed a useful life of at least four years; the company estimated ten years for the equipment and twenty years for the drydock.

Did wage levels matter? Yes. The company satisfied the production-worker wage test and received the state labor agency's certification.

Citations and references

• R.I. Gen. Laws § 44-31-1 — ten-percent investment tax credit and qualifying-property rules.
• R.I. Gen. Laws § 44-31-1(b)(3)(iv) and (b)(4) — qualified-taxpayer and manufacturing wage tests.
• 26 U.S.C. § 167 — federal depreciation reference.
• 26 U.S.C. § 179(d) — purchase definition referenced by the Rhode Island credit statute.

Source

• Landing page: Rhode Island Declaratory Rulings
• Declaratory order: Declaratory Order 2004-01

Original ruling text

Ruling Request No. 2004-01

Ruling Request No. 2004-01

Request for Ruling Regarding Eligibility for the Investment Tax Credit

On behalf of your client, Company X, you request a declaratory ruling relating to Company X’s eligibility to take a ten percent (10%) Rhode Island investment tax credit on certain leased tangible personal property in 2002.

Facts

The facts set forth in your request for ruling dated March 3, 2003, and the documents attached thereto, form the basis for this ruling.

Company X is a Delaware C corporation, primarily engaged in the design, construction, repair and overhaul of ocean-going barges and shallow-draft vessels from its shipyard located in Rhode Island . Company X is classified as a manufacturer under the Standard Industrial Classification System (SIC) major group code number 37 and subgroup number 3731 and under the North American Industry Classification System (NAICS) code number 336611. For the year 2002, the Rhode Island Department of Labor and Training has determined that Company X qualifies for the Rhode Island ten percent (10%) investment tax credit because the average annual wage paid to Company X’s full-time equivalent employees classified as production workers exceeded the average annual wage paid to all production workers in the state in the same two-digit SIC code.

At the close of business on December 31, 2001, Company X entered into an operating agreement for various equipment. Payments are due monthly on the last day of the month beginning January 31, 2002 with the last payment due on June 31, 2010. Company X has the right to purchase the equipment at the end of the lease term. The equipment leased is tangible personal property and Company X estimates that the equipment has a useful life of 10 years.

On September 1, 2002, Company X entered into an operating agreement for a drydock. Payments are due monthly on the last day of the month beginning October 1, 2002 with the last payment due on March 1, 2012. Company X has the right to purchase the equipment at the end of the lease term. The leased drydock is tangible personal property and Company X estimates that the drydock has a useful life of 20 years.

The equipment and the drydock are located in Rhode Island

Ruling Requested

Company X is eligible to take a ten percent (10%) Rhode Island investment tax credit on leased drydock and shipbuilding equipment in 2002.

Discussion

RIGL §44-31-1 provides for a ten percent (10%) credit for qualifying property that is acquired, constructed, reconstructed or erected after January 1, 1998.

A credit is allowed under this section with respect to tangible personal property and other tangible property, (excluding motor vehicles, furniture, buildings and structural components of buildings, except as provided in this section), which are depreciable pursuant to 26 U.S.C. § 167, have a useful life of four (4) years or more, are acquired by purchase as defined in 26 U.S.C. § 179(d) or acquired by lease as prescribed in subsection (b)(3)(iii), have a situs in this state and to the extent the property is used by a qualified taxpayer, as that term is defined in subsection (b)(3)(iv), in any of the businesses described in major groups 20 through 39, 50 and 51, 60 through 67, 73, 76, 80 through 82, 87 and 89 in the standard industrial classification manual.

The term “qualified taxpayer” as defined in §44-31-1(b)(3)(iv) includes a taxpayer described in major group 20-39 whose medium annual wage paid to full-time equivalent employees is above the annual wage paid by all taxpayers in the state that share the same two-digit SIC code.

R.I.G.L. §44-31-1(b)(4) further provides for eligibility with respect to major groups 20 through 39 only, where the average annual wage paid to this qualified taxpayer’s full‑time equivalent employees, classified as production workers by the Rhode Island Department of Labor and Training, is above the average annual wage paid to the production workers of all these taxpayers in the state which share the same two-digit SIC Code.

The property leased by Company X meets all the eligibility requirements of the law and the Rhode Island Department of Labor and Training has issued the certification form for the ten percent (10%) investment tax credit for year ending December 31, 2002. The taxpayer qualifies for the tax credit.

Ruling

Company X is eligible to take a ten percent (10%) Rhode Island investment tax credit on leased drydock and ship-building equipment in 2002. Since the property was leased, the credit shall be based upon the fair market value of the property at the inception of the lease times the portion of the depreciable life of the property represented by the term of the lease excluding renewal options.

This ruling may be relied upon by Company X and shall be valid until expressly revoked or until the applicable statutory provisions of law are amended in a manner that requires a different result or the underlying facts described herein change.

**R. GARY CLARK

TAX ADMINISTRATOR

MARCH 18, 2004**