State and local tax incentives play an important role in South Carolina’s economic development picture. Government grants and other financial assistance are available to encourage businesses to expand or relocate to the state, but South Carolina’s statutes provide significant tax reductions or savings in several areas which can lower the cost of doing business or financing a capital expansion. Understanding what incentives may be available for your business and the requirements for obtaining them is critical to your decision-making process for relocation or expansion. Incentives can be complicated and are subject to a variety of requirements and approval processes. But, anyone considering an expansion or relocation of a business should be aware that these incentives can provide significant help in financing a project.
At the state level, the taxes affected are income, employment and sales and use taxes. At the local (counties and municipalities) level, property taxes are affected. Most business expansions or relocations will involve some kind of credit against or reduction of the income and property taxes for the business and depending upon the scope and size of the project, could involve direct financial assistance from the government. Usually, employment tax savings are offered in conjunction with larger capital investment projects creating significant new jobs. Sales and use tax exemptions vary and are usually targeted to an industry or type of business.
Question: I am in the manufacturing business and am contemplating options for an expansion. Option A is the least costly and involves adding a new line of production machinery with associated pollution control systems at an existing facility. I estimate that this expansion will cost $10 million over the next few years. My business routinely spends $250,000 per year on capital improvement projects. With the efficiencies of the new line, no additional employees would be hired, so would that disqualify our business for all incentives?
Answer: No, but your business would qualify only for sales tax exemptions and property tax incentives. South Carolina sales tax statutes contain an exemption for machinery purchased for use in manufacturing, assembly, processing and other similar activities. Production line machinery is usually exempt. Any pollution control machinery will be exempt if it is an integral part of the manufacturing process. No advance approval for the sales tax exemption is required. (Like most manufacturers, your business has probably obtained a "direct pay" certificate from the S.C. Department of Revenue which allows you to purchase all items without being charged sales tax by the seller and requires you to file monthly sales tax returns reporting any taxable purchases. Therefore, in that situation, the purchase of the machinery considered to be exempt would not be reported on the returns.)
Property tax incentives are processed at the county government level. In South Carolina, property tax on manufacturer’s personal property is determined by taking the original cost of the property and subtracting allowed annual depreciation to ascertain the fair market value of the property. This value is then multiplied by an assessment ratio of 10.5 percent and the product thereof is multiplied by the county’s millage rate to calculate the taxes due that year. The property tax incentives would lower the assessment ratio to 6 percent and the millage rate can be "frozen" for up to 30 years. The assessment ratio reduction provides an immediate reduction in property taxes and freezing the millage rate allows the business to avoid any rate increases in the future. To obtain the incentives, the business must request the county to approve a "fee agreement" allowing the business to pay the reduced taxes on the new property for the 30 year-period. The anticipated regular additions and improvements would also qualify for the reduced rate.
Question: Option B involves building a new addition to the existing facility and installation of several new production lines and other associated capital expenditures. Our parent company would also relocate its headquarters and 60 employees from another state to the facility. Anticipated project expenses would be $50 million and over 100 new jobs would be created at the facility. How would this affect the incentives available under Option A?
Answer: By creating at least 10 jobs, jobs tax credits against South Carolina income taxes of at least $1,500 per job per year for five years are available. The South Carolina Department of Commerce would likely approve job development fees, which would allow the business to escrow a portion of its employee state income withholdings (up to 5/7ths depending on the wage level) for up to 15 years and use the escrowed monies to reimburse the business for the costs of building the new facility. Due to the new headquarters and number of new employees there, the business can claim an income tax credit for 20 percent of the costs of real property and personal property associated with the headquarters facility. The credit can be claimed in the year the headquarter’s facility opens, but can be carried forward for 10 years. Sales and use tax exemptions for the production machinery would be available as generally described in Option A. The local property tax incentives for the entire $50 million of new property would be available from the county under the "fee agreement" process. In addition, the county may offer special source revenue bonds or credits to the business which can also be used to reimburse the costs for the new building addition. In doing so, the county would designate the facility site as part of a business or industrial park and such designation would enhance the jobs tax credit above by $1,000 per new job per year.
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