After Utah's 1998 legislative amendment removed the SIC-code / manufacturing-only limits, which businesses now qualify for the Utah enterprise zone tax credits, and how do the payroll and investment credits work?

Plain-English summary

A CPA wrote to the Utah State Tax Commission in February 1999 with a long list of questions about the state's enterprise zone tax credits (then codified at Utah Code Ann. §§ 9-2-412 and 9-2-413), which apply against both individual income tax and corporate franchise tax. The CPA's county had just been designated an enterprise zone for 1998, and a 1998 legislative amendment had deleted the old rule limiting the credits to businesses in specific manufacturing-related SIC (Standard Industrial Classification) codes — so the CPA needed to know which of their many client businesses (accounting firms, tour companies, physicians, veterinarians, attorneys, cable installers, farmers, motels, storage companies, and more) could now qualify, and how the payroll and investment credits actually worked.

The Commission's October 2000 response ("Advisory Opinion – Enterprise Zone Tax Credits") walked through each question. On the core eligibility issue, the Commission confirmed that after the 1998 amendment, the SIC-code / manufacturing limitation is gone, and the only statutory business-firm limits left are that (1) at least 51% of the firm's enterprise-zone employees must reside in the municipality or county that obtained the zone designation, and (2) retail trade and public utility businesses are excluded from the credits under § 9-2-413(5). The Commission noted that its own administrative rules (R865-6F-28 and R865-9I-37) still referenced "manufacturing concern" language left over from before the amendment, and said it would begin the process of amending those rules to match the statute.

The ruling also addressed several sub-questions: employees are determined using the IRS's employee-vs-independent-contractor test, so a sole proprietor or partner with no employees (including partners paid "guaranteed payments" subject to self-employment tax) does not generate payroll-credit eligibility; land does not qualify for the investment credit because it isn't depreciable, but computer software does; there is no basis-adjustment or recapture requirement, and taking federal Section 179 expensing doesn't affect eligibility; despite outdated rule language, "replacement" investments (not just expansions) do qualify for the investment credit because nothing in the statute excludes them; a mixed retail/non-retail firm can still qualify for the non-retail portion if the retail activity is de minimis, but a disqualified retail firm's administrative staff don't separately qualify; construction jobs are excluded from the new-position payroll credits, but employees doing facilities maintenance/repair (as opposed to construction) can qualify, as can administrative jobs at an otherwise-eligible firm; and a taxpayer who missed claiming the credit on an original 1998 return can file for a refund, generally within three years, under § 59-7-522(2) (corporate) or § 59-10-529(7)(b) (individual).

What this means for you

Business owners in a Utah enterprise zone (as of this 1998-99 tax-year guidance)

If your business isn't retail trade or a public utility, and at least 51% of your enterprise-zone employees live in the zone's municipality or county, the Commission's position at the time was that you could potentially qualify for enterprise zone credits regardless of your industry — the old manufacturing-only limitation had been repealed. Sole proprietors and partners without actual W-2-type employees generally couldn't claim the payroll-based credits on their own labor. If you're evaluating an old return or a similar current program, don't assume this specific SIC-code analysis still applies (see the disclaimer below) — Utah's enterprise zone program has since been overhauled.

Accountants and tax preparers reviewing older Utah returns

This ruling is useful mainly as a historical snapshot of how the Commission read the 1998 amendment to §§ 9-2-412 and 9-2-413: it confirms the 51%-local-employee test and the retail/utility exclusion as the only remaining statutory eligibility screens, clarifies the employee test (IRS 20-factor / independent-contractor standard), and confirms that replacement investments (not just net-new expansion) qualify for the investment credit, that land doesn't qualify but software does, and that missed 1998 credits could be claimed via amended return within the normal 3-year refund window under §§ 59-7-522(2) and 59-10-529(7)(b).

Economic-development and policy readers

The ruling documents the Commission's own acknowledgment that its rules (R865-6F-28, R865-9I-37) hadn't caught up to a legislative amendment — the rules still assumed a "manufacturing concern" and pre-1994 hiring dates, and the Commission said it would start a rulemaking process to fix that. It's a good illustration of how much a program's real-world eligibility can shift with an under-the-radar statutory amendment even before the rules are formally updated.

Common questions

Q: Did every kind of business become eligible for Utah's enterprise zone credit after 1998?
A: Not every kind — retail trade and public utility businesses were still excluded under § 9-2-413(5). But the earlier limitation to manufacturing-related SIC codes was gone, so the Commission said other business types (service firms, professional practices, farms, lodging, etc.) could potentially qualify if they met the 51% local-employee test.

Q: Can a sole proprietor or partner count their own work toward the payroll credit?
A: No. The Commission applied the IRS's test for distinguishing employees from independent contractors/self-employed persons, and concluded a sole proprietorship or partnership with no actual employees (including partners paid "guaranteed payments" subject to self-employment tax) would not qualify for the payroll-based credits.

Q: Does land qualify for the investment tax credit?
A: No — the credit requires "depreciable" plant, equipment, or other property, and land isn't depreciable. Computer software, by contrast, was treated as depreciable property that could qualify.

Q: If I replace old equipment instead of buying entirely new equipment, do I still get the investment credit?
A: According to this ruling, yes. The Commission found no statutory basis for the rules' statement that "replacement of existing assets does not qualify," so it concluded replacement investments do qualify absent a legislative directive otherwise.

Q: Can I rely on this ruling for my business today?
A: No, on two levels. First, a Utah private letter ruling binds the Commission only for the taxpayer and facts it was issued to. Second, this ruling is now roughly a quarter-century old and interprets a statute (the Enterprise Zone Act) that has since been repealed and replaced by newer economic-development credit programs — the citations here won't match current law.

Citations and references

Statutes (Utah Code Ann., as in effect at the time of this ruling):

• § 9-2-412 — enterprise zone "business firm" qualifications; pre-1998 version limited credits to certain SIC codes, the 1998 amendment removed that limit and left only the 51%-local-employee test
• § 9-2-413 — the enterprise zone tax credits themselves, including subsection (5) (retail trade/public utility exclusion), (1)(a)-(d) and (2)(d) (payroll-based "new position" credits, excluding construction jobs), and (1)(g) (10%/5% investment tax credit on qualifying plant, equipment, or depreciable property)
• § 59-7-522(2) — time limit (generally 3 years) for a corporate franchise tax refund claim
• § 59-10-529(7)(b) — time limit (generally 3 years) for an individual income tax refund claim

Rules:

• Utah Admin. Rule R865-6F-28 — Commission rule implementing the enterprise zone credit for corporate franchise tax (contained outdated "manufacturing concern" and pre-1994 hiring-date language the Commission said it would amend)
• Utah Admin. Rule R865-9I-37 — parallel Commission rule for individual income tax

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original page: https://files.tax.utah.gov/tax/commission/ruling/99-021.htm

Original ruling text

99-021

Response October 17, 2000

REQUEST LETTER

99‑021

February 18, 1999

Re: Enterprise
Zone Credit

Dear Mr. Chapman;

I am a CPA working in COUNTY County and have
to determine eligibility for the Utah enterprise zone credit for several 1998
income tax returns. COUNTY was first designated as an enterprise zone effective
for 1998. I have had conversations with NAME of the Tax
Commission and also NAME of COMPANY.
Neither have been able to answer my questions, due in part evidently
because of the recent legislation removing the SIC references in the tax code
for eligible companies. NAME directed
me to you.

By this letter I hope to receive direction
which I can apply to the myriad of client businesses which may be impacted by
the enterprise zone credit. I have the
full code text and also R865-6F-28. I
also have the brochure published by Economic Development. These sources do not address the questions
that follow in a manner sufficient to allow me to make confident determinations
in the areas mentioned below.

The first issue is what kind of business is
now (1998) eligible for the credit. The 1998 amendment, effective January 1,
1998, eliminated Code Section 9-2-412 (2). The deleted section referred to SIC
codes, which limited the credit to manufacturing establishments.

It appears now that the only criteria for
eligibility is 9-2-412(1) which requires at least 51% of the company employees
employed at facilities located in the enterprise zone be residents in the
municipality or county that applied for designation. I realize an additional criteria exists under 9-2-413 (5)which
excludes businesses engaged in retail trade or public utilities.

Does this mean that any business (other than
retail and public utilities) is eligible?
For example, am I eligible as an accounting office since I am a service
business? What about tour companies,
physicians, veterinarians, and attorneys?
I have a client that installs phone/t.v.cable ‑ are they eligible?
what about farmers and ranchers? What about motels/bed & breakfast inns?
What about storage unit companies?

Is there some more definitive criteria by
which to determine eligibility?

A second part of this issue is does a
business have to have employees to be eligible? Can a sole proprietorship
qualify for the investment credit 9-2-413(1)(g)? Can the net profits of a sole proprietorship qualify for any of
the wage/payroll related credits?

On a similar note, do the "Guaranteed
Payments" paid by a partnership or limited liability company to
partners/members for services qualify as wages for purposes of the payroll
related credits 9-2-413 (l)(a-d)? These
payments are in lieu of wages, are deductible by the partnership/L.L.C. just
like wages, and are subject to self employment tax at the individual
level. 9-2-413(2)(c) refers to
reporting to Workforce Service ‑ guaranteed payments to partners are not
reported to Workforce Services.

The investment credit under 9-2-413(g)
potentially could be very important to several taxpayers. The code refers to "qualifying
investment in plant, equipment, or other depreciable property." R865-6F-28 adds that the property must be
newly purchased or constructed.

R865-6F-28(B)(2) says property does not
qualify until the "manufacturing concern is operational within the
enterprise zone." Is this
reference to manufacturing an oversight by the 98 amendment and we disregard it
as an eligibility criteria, or does this
effectively negate the intent of the 98 amendment and still only manufacturing
concerns are eligible for the investment credit?

What type of property is eligible? Does this include buildings of all types, licensed motor vehicles,
computers/office equipment, depreciable farm animals and other farm equipment,
and motel buildings? Does the equipment
have to be new, or can it just be new to the taxpayer (i.e. can the taxpayer
buy used equipment as long as it had not been used by him or by any business controlled
by him)?

If depreciable property qualifies for the
credit, is there any basis adjustment similar to the old Federal investment
credit basis reduction? Is there any
special recapture on subsequent disposition of property upon which the credit
was taken? Does depreciation for Utah
purposes require adjustment? Does election for Federal Section 179 first year
expensing affect eligibility for the enterprise zone investment credit?

Does land qualify for the credit (i.e. Aplant@)?

R865-6F-288 says replacement of existing assets does not qualify for the
investment tax credit. Does this mean if I have four computers in my office in
1997, and in 1998, I junk two and buy two new ones, I receive no credit for the
two new computers? And if so, does it
mean that to get a credit I would have to end up with five computers in order
for one of the new ones to be eligible?
Is section C still relevant after the 98 amendment?

In applying section C, what guidelines are
available? Does it apply literally, as
in my example above? What if one of the
new computers cost twice what one of the retired computers cost? How do we determine replacement versus
expansion? For example, if we retire a
quarter-ton pickup and purchase a half-ton pickup, are we eligible for any
credit?

Does computer software qualify in any way?

How does R865-6F-28( ) fit into the payroll related credit
eligibility? How can someone just
filling a position created in 1998 be employed at least six months prior to December 31, 1994?

We have business clients that simultaneously
conduct manufacturing and retail operations from the same facility. We have clients that conduct both service
operations and retail sales from the same facility. Are the non-retail
components of these businesses eligible for the enterprise zone credits, or are
they tainted by the retail operation and not eligible in any manner?

R865-6F-28(A)(2) and (B)(4)( b) imply that
the non-retail portions would be eligible.

For retail companies, can administration
activities qualify if they are not involved in direct selling to the public
(R865-6F-28)?

9-2-413(2)(d) specifically excludes
construction jobs from eligibility for the payroll based credits. Does
construction include electricians, plumbers and concrete contractors? Are these businesses eligible for the
investment credit? Are administration
wages paid by these types of companies eligible?

If a taxpayer does not claim the credit on a
1998 return as originally filed, and subsequently determines that he/she was
eligible for either the payroll based or the investment credit, is he/she
allowed to file an amended return and claim the credit? If so, do any special time limitations
apply?

I apologize for the somewhat rambling
structure of this letter. I'm trying to cover as many of the circumstances as
possible in anticipation of this filing season. I have tax returns involving
every example listed above waiting for a determination of eligibility for the
enterprise zone credit. Please respond
as soon as possible, and in any form that is convenient. Any information that you could provide would
be greatly appreciated. Thank you for
your consideration.

Sincerely,

NAME

RESPONSE
LETTER

October 17, 2000

RE: Advisory
Opinion - Enterprise Zone Tax Credits

Dear NAME,

You have requested information concerning the
enterprise zone tax credits that are authorized under Utah Code Ann. '9-2-413 and applied against Utah=s individual income and corporate franchise
taxes. Many of your questions concern
the 1998 Legislature=s
amendments to the statutes governing the credits. We shall first discuss how these statutory changes affect which Abusiness firms@ qualify for the tax credits, then address your other issues.

Business Firm. Of
primary concern is determining which Abusiness firms@ now
qualify for the enterprise zone tax credits.
Prior to January 1, 1998, Utah Code Ann. '9-2-412 provided that:

The [enterprise zone] tax incentives
described in this part are available only to business firms meeting the
following qualifications:

(1)
at least 51% of the employees employed at facilities of the firm located
in the enterprise zone are individuals who, at the time of employment, reside
in the enterprise zone; and

(2)
the firm operates within the enterprise zone a business whose primary
activity lies within standard industrial codes 2011 through 3999, 4221 through
4231, 5093, 7371 through 7375, and codes 7379, telemarketing firms within 7389,
7629, 7692, 7694, and 7699, as set forth in the 1987 Revisions of the Standard
Industrial Classification Manual.

The
1998 Legislature amended section 412 and completely eliminated all reference to
the SIC codes. Revised section 412,
effective on January 1, 1998, provides as follows:

The tax incentives described in this part are
available only to a business firm for which at least 51% of the employees
employed at facilities of the firm located in the enterprise zone are
individuals who, at the time of employment, reside in the municipality or
county that applied for the enterprise zone designation.[1]

A comparison of these prior and current
statutes shows that prior to January 1, 1998, a business firm did not qualify
for the enterprise zone tax credits unless it was designated under one of the
enumerated SIC codes, a qualification that no longer applies. After the 1998 amendment, the only statutory
guidance limiting which business firms qualify for the tax credits is found in
Utah Code Ann. '9-2-413.
Subsection 413(5) states that the enterprise zone tax credits are not
available to retail trade or public utilities businesses.[2] In addition, subsection 413(2)(d)

In addition to these statutory limitations,
Utah Admin. Rules R865-6F-28 (ARule 28") and R865-9I-37 (ARule 37") imply that only manufacturing operations can qualify as
business firms receiving the tax credits.
However, neither of these rules has been amended since 1993. Because the 1998 statutory amendment deleted
the SIC code references, the rules now too narrowly define the business firms
that qualify for the tax credit.
Accordingly, the Commission will commence a procedure to amend the rules
to provide a more comprehensive definition of qualifying business firms.

Employee Requirement.
Section 412 states that the tax credits are not available unless 51% of the business firm=s employees reside in the jurisdiction that
applied for the enterprise zone designation.
The Internal Revenue Service (AIRS@) uses a 20-factor test to determine whether
a worker is an employee or independent contractor. It has also determined that persons in business for themselves,
such as physicians, lawyers, and accountants, are not employees. (Reg '31.3401(c)-1(c)). We believe
these IRS guidelines are appropriate for determining whether a business firm qualifies
for the enterprise zone tax credits.
Accordingly, a qualifying sole proprietorship which has employees would
be eligible for enterprise zone tax credits, while a sole proprietorship
without employees would not. Similarly,
a partnership without employees, where the partners receive payments that are
subject to self-employment tax at the individual level, would not be eligible
for the tax credits.

Tax Credit for Plant, Equipment, or Other
Depreciable Property. Subsection 9-2-413(g), a specific enterprise
zone tax credit related to property investment, allows for Aan annual investment tax credit of 10% of the
first $250,000 in investment, and 5% of the next $1,000,000 qualifying
investment in plant, equipment, or other depreciable property.@
Portions of Rule 28 and Rule 37 address this specific tax credit and
provide that an investment will not qualify for the credit until the Amanufacturing concern is operational.@ As
discussed earlier, the recent statutory changes deleting the SIC code references
will require amendments to the rules to eliminate all Amanufacturing@ references. During the
amendment process, the Commission will consider comments from all affected
parties before determining exactly which investments qualify as plant,
equipment, or other depreciable property.
Nevertheless, you have identified several issues concerning this tax
credit that we can presently address.

(1) Depreciable Property. Subsection 413(g) specifies that a Aqualifying investment@ must relate to Aplant, equipment, or other depreciable
property.@ The
statutory construction of the subsection leads us to conclude that any plant or
equipment must first be depreciable before it can be considered for the tax
credit. Accordingly, land would not
generally qualify as Aplant@ because it is not depreciable. On the other hand, because computer software
is generally considered depreciable property, it would qualify for the tax
credit if all other requirements are met.

(2) Consequences of Qualifying for This Tax
Credit. Utah does not require recapture
of the subsection 413(g) tax credit if the property that qualified for the
credit is later sold. Nor does the
State require an adjustment to bases or depreciation schedules pertaining to
property that qualifies for the tax credit.
Lastly, the tax credit is still available even if the qualifying
property is subjected to IRC '179 for federal tax purposes.

(3) Replacement Investments. Although subsection 413(g) refers to Aqualifying investments,@ it does not specifically exclude Areplacement@ investments from the credit.
Nevertheless, subsection 8 in both Rule 28 and Rule 37 provides that A[t]he replacement of existing assets does not
qualify for the investment tax credit.@ We find no statutory authority
for the rules to narrow the availability of this tax credit in this
manner. Without a legislative directive
suggesting otherwise, replacement investments also qualify for this tax credit.[4] The rules will be revised to comport with
the statute.

Employment Prior to December 31, 1994.
Subsection (G) of Rule 28 and subsection (F) of Rule 37 provide that the
enterprise zone tax credits are available only for employees employed for six
months prior to December 31, 1994. As
the tax credits are available for employees hired after these dates, these
subsections are outdated and will either be removed or amended during the rule
amendment process.

Retail Trade Operations. As
previously discussed, subsection 9-2-413(5) specifies that a business engaged
in retail trade does not qualify for any of the enterprise zone tax
credits. When a business firm conducts
both retail trade operations and non-retail operations, the business firm may
still be eligible for the tax credits, but only if the retail trade operations
are a de minimis portion of the business firm=s total operations. Also, if a
retail trade business firm does not qualify for the enterprise zone tax
credits, its Aadministration activities@ may not separately qualify. Administration activities qualify for the
tax credits only if they are related to a business firm that qualifies for the
tax credits.

Construction Activities. A
number of enterprise zone tax credits are available to businesses that fill Anew positions,@ with the exception that construction jobs are not eligible for these
specific credits. See '9-2-413(1)(a) - (d), (2)(d). Jobs filled by electricians, plumbers, and
concrete workers are generally considered construction jobs and, accordingly,
do not qualify for the Anew position@ tax
credits. Nevertheless, such employees
may be hired to perform facilities maintenance and repair work instead of
construction work. Such employees would
not be filling construction jobs, so the business filling these positions would
be eligible for the tax credits. Should
an employee perform duties that include both facilities maintenance and repair
work and construction work, the job will be considered a Aconstruction job@ and excluded from the tax credits unless the
amount of construction work performed by the worker is a de minimis amount.

A business firm may still qualify for
enterprise zone tax credits even though some of its employees are filling
construction jobs. As discussed
earlier, Aadministration activities@ qualify for the tax credits if they are
related to a business firm that qualifies for the tax credits. Accordingly, should a business firm qualify
for enterprise zone tax credits, its administrative positions may also qualify
for tax credits even though some of its employees are filling construction
jobs.

Filing Amended Returns. If
a taxpayer has not claimed an enterprise zone tax credit for a prior year and
was eligible to do so, the taxpayer may file a claim for refund of the tax
overpayment. The time limit for such
claims is generally three years from the time the tax was paid. See Utah Code Ann. ''59-7-522(2) and 59-10-529(7)(b).

You will be informed of the proposed
amendments to Rule 28 and Rule 37 in the near future. We welcome any comments you may have concerning them. If you have any other questions, please
contact us.

For the Commission,

Marc B. Johnson

Commissioner

[1] The 1999 Legislature also amended this section so
that, as of effective May 3, 1999, it provides that A[t]he tax incentives described in this part are
available only to a business firm for which at least 51% of the employees
employed at facilities of the firm located in the enterprise zone are
individuals who, at the time of employment, reside in the county in which the
enterprise zone is located.@

[2] This subsection was renumbered by the 1998
Legislature, and prior to amendment by the 1999 Legislature, effective May 3,
1999, only applied to the enterprise zone tax credits under subsections (1)(a)
through (d).

[3] This subsection was not amended by either the 1998 or
1999 Legislatures.

[4] This
position reverses the Commission=s prior decision in