What tax incentives are available under the JOBZ program?
JOBZ provides a variety of tax benefits to qualified businesses and some
individuals located in a zone. These include the following:
- Individual income tax exemption for trade or business income, rents, and certain capital gain income
- Corporate franchise tax exemption
- Sales tax exemption for business purchases for use in the zone, including motor vehicle purchases
- Property tax exemption
- Wind energy production tax exemption
- Refundable jobs credit
What is a qualified business?
Tax incentives under JOBZ require (in nearly all instances) the involvement
of a qualified business. If the tax incentives are provided directly to the
business entity, it must be a qualified business. If incentives are provided to
an individual, it generally must be based on an investment in or operation of a
qualified business. The law's definition of "qualified business" requires
satisfying a multi-part test:
- Operating in zone under business subsidy agreement. In general, a
qualified business is an individual, corporation, LLC, or any other entity
carrying on a trade or business (e.g., an office or factory) in the zone for
which it has entered into a business subsidy agreement with the appropriated
local government.
- DEED deal evaluation test. Before entering a business subsidy agreement
(and thereby allowing a business to qualify for JOBZ benefits), the local
government must evaluate the business's proposed operation in the zone under a
set of scoring criteria developed by Department of Employment and Economic
Development (DEED). The criteria include wages paid, amount of sales generated
from outside of the state, amount of new capital investment, and similar
requirements. The criteria mandated by the statute are found in Minnesota
Statutes, section 469.310, subdivision 11, paragraph (c).
- Relocation restrictions. Special restrictions apply if the business
relocates all or part of an existing Minnesota operation into the zone. In
that case, it must increase the employment of the relocated operation by the
greater of (1) five jobs or (2) 20 percent. In addition, it must enter a
binding, written agreement with the commissioner of DEED to maintain this
level of employment and repay the tax benefits if it fails to do so. The
commissioner can waive the requirement to expand employment based on a
determination that the purposes of JOBZ will be met without doing so. (Note:
as described below, relocating businesses only qualify for a proportion of
some of the tax incentives equal to the increase in the payroll of the
relocated operations.)
- Minimum compensation rules. Qualified businesses must pay each
employee at a rate that, if paid over a full year, would equal or exceed 110
percent of the federal poverty level for a family of four. For 2011, this
requires payment of about $10.60/hour. (The amount is adjusted annually.)
Benefits, such as employer-paid health insurance, that are not mandated by law
count in determining the required compensation. Although the law does not
specify this, the requirement likely applies only to the business's employees
who work at locations in the zone.
Effective date of the 2005 changes. The 2005 Legislature substantially
revised the definition of a qualified business, adding the DEED deal evaluation
requirement and the minimum compensation requirement. In addition, the 2005
legislation repealed a prior law allowing a relocating business to qualify by
making a large capital investment in zone. These 2005 changes became effective
for business subsidy agreements entered after June 30, 2005.
Can a retailer be a qualified business?
Yes, but only if the retailer is not primarily engaged in selling to
purchasers located in the zone. Thus, a store that mainly sells to shoppers in
the store would not qualify, while a catalogue or mailorder sales operation
would.
Can a public utility be a qualified business?
No, the law prohibits a public utility, as defined in Minnesota Statutes,
section 300.111, from being a qualified business. This applies to entities
engaged in producing, generating, transmitting or selling gas, electric, or
telephone service. The 2005 Legislature enacted this prohibition in response to
the grant of JOBZ status to Meeker Cooperative Light and Power Association by
the city of Litchfield. It was effective for business subsidy agreements entered
into after July 14, 2005.
Does the business subsidy law apply to tax incentives under JOBZ?
Yes, in order to qualify for JOBZ tax incentives, a business must enter a
business subsidy agreement with the zone or subzone administrator.
Do tax incentives extend beyond the duration of the zone?
No, tax incentives are available only during the designation of a zone. This
will cause the JOBZ incentives to diminish in attractiveness to businesses newly
locating in a zone as time goes by. For example, a business locating in a zone
in year eight of the 12-year designation would only qualify for only four years of tax
incentives.
The legislature has enacted three exceptions to this general rule. See here for a
general description.
What is a qualified business's "zone percentage" and how is
it calculated?
The zone percentage is used to apportion income for purposes of calculating
JOBZ's exemptions under the individual and corporate franchise taxes. It is
based on the average of the zone property and payroll ratios to total Minnesota
property and payroll. The zone percentage equals the sum of the two ratios (zone
payroll/Minnesota payroll + zone property/Minnesota payroll), divided by two.
What is the relocation payroll percentage?
This factor applies to qualifying businesses relocating operations into a
zone. The percentage is used to reduce or apportion the individual income tax
and corporate franchise tax exemptions for business income. The intent is to
limit the tax incentives in proportion to the qualified business's increases in
its payroll of the relocated operations. The relocation percentage does not
apply to the sales or property tax exemptions or to the individual income tax
exemptions for rents or capital gains; the business receives the full benefits
of those exemptions. The jobs credit formula limits the credit's benefits to
increases in payroll.
The relocation payroll percentage is determined for each taxable year as
follows:
(zone payroll - relocated payroll)
zone payroll
The relocated payroll amount is the payroll of relocated operations in the
last full year of operations before the relocation. Note that this amount is not
adjusted for inflation, so payroll increases to compensate for inflation qualify
for the tax benefits. The law is not clear, but relocated payroll likely
excludes payroll from operations outside of Minnesota. For example, the
restrictions preventing some relocating operations from being a "qualifying
business" in the definition section of the statute apply only to the relocation
of Minnesota operations. (Note: restrictions tied only to relocation of
Minnesota operations may raise constitutional concerns about whether the
incentives discriminate against interstate commerce.)
Effective date. The 2005 Legislature added the zone payroll percentage
limitation. It applies to business subsidy agreements that are fully effective
after August 31, 2005. Business subsidy agreements that were fully effective
before that date receive the full exemption.
What income qualifies for the individual income tax exemption?
The individual income tax exemption applies to three categories of income
received by individuals, trusts, or estates:
- Rents.Net rents derived from either real or personal property used
in the zone are exempt from individual income taxation. Rents from
manufacturing, office, retail, or housing properties appear to qualify for
this exemption. For personal property that is used both within and outside of
the zone, the lessor must allocate the rent based on the days of use in the zone to determine the amount of the
exemption. Because the owner must be a qualified business, selling or exchanging
a property outside of the zone for a property in the zone would not qualify,
unless the relocation test is satisfied (requiring a 20 percent increase in
employment of at least five jobs).
- Business income. Income derived from operating a qualified business
in the zone is exempt. If the business is carried on both within and outside
of the zone (i.e., it has facilities or employees outside of the zone), then
the income from the business is apportioned based on the average of its
property and payroll in the zone to determine the exemption amount. For
resident individuals, this apportionment is based on average ratio of zone
property and payroll to all property and payroll. For nonresidents, the
apportionment is based on the average ratio of zone property and payroll to
Minnesota property and payroll. This difference in apportionment methods
reflects the fact that residents are taxable on all of their income, including
that derived from non-Minnesota sources. By contrast, nonresidents pay tax
only on their Minnesota source income. The exemption amount is capped at 20
percent of the sum of zone payroll and the adjusted basis of the property in
the zone at the time the property was placed in service in the zone. The law
is not clear whether this cap is an annual test (e.g., that the adjusted basis
is used each year, along with that year's payroll) or whether it applies over
the life of the qualified business's operations in the zone (i.e., adjusted
basis plus lifetime zone payroll for the business).
- Capital gains. Gain realized on sale or exchange of (a) real
property located in the zone, (b) personal property used in the zone, or (c)
an ownership interest in a qualified business operating in a zone is exempt.
For real and personal property, the exempt gain is determined by allocating
the ownership period based on the period of zone designation and for (personal
property) use within and outside of the zone. For example, for gain on the
sale of real property if one-half of the holding period consisted of time when
the zone was designated, one-half of the gain would be exempt. For gain on the
sale of a business interest (e.g., shares of stock or partnership interest),
the gain is exempt based on the business's zone percentage. To qualify for
any exemption, this percentage must be at least 25 percent. The qualified
business is required to certify its zone percentage to the holder upon
request.
How is the corporate franchise tax exemption determined?
A qualified business operating in a zone is exempt from the corporation
franchise tax. (The corporate franchise tax is often referred to as the
corporate income tax.) This includes exemptions under the regular tax, the
alternative minimum tax, and minimum fee. The regular tax exemption is
determined by multiplying the corporation's income by its zone percentage
and its relocation payroll percentage.
The product is subtracted from the corporation's Minnesota taxable net income (i.e., after it has been
apportioned to Minnesota). A similar procedure in used to calculate the
exemption from the corporate alternative minimum tax. Since the zone percentage
is based on zone property and payroll, this exemption is based on the proportion
of the business's Minnesota production that is in the zone. As under the
individual income tax, the amount of income exempted is capped at 20 percent of
the sum of zone payroll and the adjusted basis of the property in the zone at
the time the property was placed in service in the zone.
How is the exemption from the minimum fee on business
entities calculated?
The business entity minimum fee applies to corporations and "pass-through"
tax entities, such as S corporations and partnerships that are exempt from the
regular corporate franchise tax and the alternative minimum tax. The fee is
calculated based on the Minnesota property, payroll, and sales of the business
entity. The exemption simply excludes zone property and payroll from the minimum
fee calculations. If the business's only operations are located in the zone, the
business is completely exempt from the minimum fee. Thus, these businesses will
be exempt from any fee that would apply based on their Minnesota sales, while
businesses with operations within and outside of the zone would not enjoy an
exemption for their sales---whether made from zone locations or not.
What is exempt from sales taxation in a zone?
Qualified businesses are exempt from state and any local sales taxes that
otherwise would apply to their purchases. This exemption applies to goods and
services used or consumed in the zone; a business cannot conduct its procurement
activities in the zone for use outside of the zone and qualify for the
exemption. The exemption includes building materials purchased by a contractor
to build facilities in the zone for a qualified business. In addition, purchases
by a qualified business of motor vehicles are exempt from the motor vehicle
sales tax.
Are residents of the zone exempt from sales tax?
No, the exemption is limited to purchases by qualified businesses for use by
the business. Purchases by residents for personal consumption purposes are not
exempt.
What property is exempt from taxation in the zone?
The property tax exemption applies only to improvements (e.g., buildings)
classified as commercial and industrial property. Thus, the exemption does not
apply to the land value or residential or agricultural use property. To qualify
for an exemption, the occupant of the property must be a qualified business.
Does the property tax exemption apply to all levies?
No, levies to pay general obligation bonds and school operating referendum
levies, approved before the designation of the zone, are not included in the
exemption. Zone properties must continue to pay these property taxes.
Can tax increment financing (TIF) be used within a zone to
capture the non-exempt property tax levies?
No, this property is generally exempt from taxation and, therefore, is not
included in captured tax capacity under the TIF Act. Captured tax capacity is
the value that generates tax increment. Thus, exclusion from captured tax
capacity prevents the generation of increment even though the property pays some
debt levies. (School operating referenda, the other category of taxes that
continue to apply, are calculated on market value, rather than tax capacity, and
do not enter in TIF calculations at all.)
In addition, if a TIF district is
created within a zone, when the zone designation expires and the property
becomes taxable, the value at the time of the expiration of the exemption will
be included in "original tax capacity" of the TIF district. This will prevent
capturing of increases in the value of the property that occur during the zone
designation. (Note: In the biotechnology zone law, the legislature explicitly
provided that a TIF district could capture these increases when the zone
expired. This was intended to allow combining zone incentives during the
duration of the zone designation with TIF incentives after the biotech zone
expires.)
Does state aid replace all or part of the lost tax base under
JOBZ?
No. Although the original JOBZ law did provide for payment of state aid to cities and counties
in certain circumstances, the 2005 Legislature repealed this aid authorization.
How is the jobs credit calculated?
JOBZ provides a refundable jobs credit for qualified businesses located in
zones. This credit applies roughly to the amount of pay to new workers in the
zone that exceeds $30,000 but not more than $100,000 per year. The credit is
calculated by taking the lesser of (1) the zone payroll for the calendar year,
minus the zone payroll in the year before designation of the zone or (2)
Minnesota payroll for the calendar year, minus Minnesota payroll for the year
before the zone designation. (This limitation is intended to prevent businesses
that reduce jobs elsewhere in Minnesota from qualifying for an offsetting
increase in zone jobs.)
Second, the increase in the number of FTE employees in the zone over the
calendar year before the designation of the zone is multiplied by $30,000 and
subtracted. Third, the remainder is multiplied by seven percent to yield the
credit. (In calculating payroll, amounts paid in a calendar year over $100,000
are excluded from the calculation. This caps the credit attributable to
compensation paid to any employee at $4,900 = ($100,000 - $30,000) * 7% credit
rate.) If the credit exceeds the tax liability of the business, the state
provides a refund to the business.
The $30,000 and $100,000 amounts are indexed for inflation. For the year 2013,
the amounts had increased to $37,450 and $124,840.
What are the tax expenditures for the JOBZ tax incentives?
The Department of Revenue
biennially estimates state tax expenditures. The most recent edition of these
estimates was prepared in February 2014. State of Minnesota Tax Expenditure
Budget Fiscal Years 2014 – 2017, available at:
www.revenue.state.mn.us/research_stats/research_reports/2014/2014_tax_expenditure_links.pdf.
The table summarizes the tax expenditures for the various JOBZ tax incentives from this report. The amounts are in thousands of dollars. The amounts in fiscal year 2017 reflect the scheduled expiration of the program.
JOBZ Tax Expenditures
Fiscal Years 2014-2017
(amounts in thousands)
| Tax Incentive |
FY 2014 |
FY 2015 |
FY 2016 |
FY 2017 |
| Individual income tax exemption | $5,400 | $5,400 | $5,400 | $200 |
| Jobs credit -- individual income tax | 1,600 | 1,600 | 1,600 | 100 |
| Corporate franchise tax exemption | 6,700 | 6,700 | 6,700 | 400 |
| Jobs credit -- corporate franchise tax | 2,300 | 2,300 | 2,300 | 100 |
| Sales tax exemption | 10,500 | 10,000 | 5,100 | 200 |
| Motor vehicle sales tax exemption | 100 | 100 | 100 | 0 |
| Property tax exemption | 14,600 | 14,600 | 14,600 | 14,600 |
| Total | 41,300 | 40,800 | 35,900 | 18,100 |
July 2014