86R13174 BEF-F
By: Reynolds H.B. No. 4225
A BILL TO BE ENTITLED
AN ACT
relating to a franchise tax credit for investment in certain
communities; authorizing a fee.
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
SECTION 1. Chapter 171, Tax Code, is amended by adding
Subchapter O to read as follows:
SUBCHAPTER O. TEXAS NEW MARKETS DEVELOPMENT PILOT PROGRAM
Sec. 171.751. PILOT PROGRAM. The comptroller shall
implement the Texas New Markets Development Pilot Program to
encourage capital investment and job creation and retention in
redevelopment communities by allowing taxable entities to earn
franchise tax credits in connection with those investments.
Sec. 171.752. DEFINITIONS. In this subchapter:
(1) "Credit allowance date" means, with respect to a
qualified investment, the first, second, third, fourth, fifth,
sixth, or seventh anniversary of the date the qualified investment
was issued.
(2) "Long-term debt security" means a debt instrument
issued by a qualified community development entity at par value or a
premium with a maturity date at least seven years after the date of
issuance and no acceleration of repayment, amortization, or
prepayment features before the original maturity date except in
instances of default.
(3) "Purchase price" means the amount of cash paid to a
qualified community development entity in exchange for a qualified
investment.
(4) "Qualified community development entity" means an
entity that:
(A) is certified by the United States secretary
of the treasury under 26 U.S.C. Section 45D; and
(B) has entered into, or is controlled by an
entity that has entered into, an allocation agreement with the
Community Development Financial Institutions Fund with respect to
tax credits under 26 U.S.C. Section 45D and is authorized to conduct
business in this state under the agreement.
(5) "Qualified investment" means an equity investment
in, or a long-term debt security issued by, a qualified community
development entity that is:
(A) issued solely in exchange for cash;
(B) designated by the qualified community
development entity as a qualified investment; and
(C) approved by the comptroller as a qualified
investment.
(6) "Redevelopment community" means a municipality
that:
(A) was incorporated on or before September 1,
1960;
(B) has a population of more than 67,000; and
(C) is located in two counties, with at least 90
percent of the municipality's territory located in a county with a
population of at least 580,000 and the remaining territory located
in a county with a population of at least four million.
(7) "Redevelopment investment" means an investment
made by a qualified community development entity in a business
located in a redevelopment community using the proceeds from the
purchase price on one or more qualified investments.
Sec. 171.753. ELIGIBLE INDUSTRIES. (a) The comptroller
shall designate, using the North American Industry Classification
System, industries that are eligible to receive redevelopment
investments. The comptroller shall designate those industries that
have the greatest potential to create strong positive impacts on or
benefits to the economies of redevelopment communities.
(b) A qualified community development entity may not make a
redevelopment investment in a business unless the principal
activities of the business are in an eligible industry. The
comptroller may waive this limitation if the comptroller determines
that the redevelopment investment will have a positive impact on a
redevelopment community.
(c) In an area of a redevelopment community where the median
family income is not more than 50 percent of the median family
income for the redevelopment community, the comptroller may allow a
redevelopment investment in:
(1) an office building project that guarantees a
minimum average occupancy rate of at least 90 percent; or
(2) a retail project that guarantees a minimum average
occupancy rate of at least 90 percent.
(d) A tax credit in connection with a redevelopment
investment described by Subsection (c) is subject to recapture if
the office building project or retail project fails to achieve the
minimum occupancy rate required by that subsection.
Sec. 171.754. APPLICATION. A qualified community
development entity must apply to the comptroller for approval of a
proposed investment as a qualified investment. The application must
include:
(1) the name, address, and tax identification number
of the qualified community development entity;
(2) proof of certification as a qualified community
development entity under 26 U.S.C. Section 45D;
(3) a copy of an authorization document executed by
the qualified community development entity, or its controlling
entity, authorizing the entity to conduct business in this state;
(4) a description of the proposed amount, structure,
and purchasers of the proposed investment;
(5) the name and tax identification number of each
taxable entity that will claim a credit under this subchapter in
connection with the qualified investment;
(6) a detailed explanation of the expected impact of a
proposed qualified investment and the related redevelopment
investments;
(7) a resolution of support from the governing bodies
of the redevelopment communities where redevelopment investments
will be made;
(8) a resolution of support from the economic
development council, if any, of each redevelopment community
described by Subdivision (7);
(9) a nonrefundable application fee of $1,000, payable
to the comptroller;
(10) a statement that the qualified community
development entity will make redevelopment investments only in the
industries designated by the comptroller or as otherwise allowed by
the comptroller;
(11) the qualified community development entity's
plans for fostering relationships with local economic development
organizations in the redevelopment communities where the entity
will make redevelopment investments and an explanation of the steps
the entity has taken to implement those plans; and
(12) a statement that the qualified community
development entity will not make a redevelopment investment in a
business unless the business will create or retain jobs that pay an
average wage equal to at least 115 percent of the federal poverty
income guidelines for a family of four.
Sec. 171.755. REVIEW. (a) The comptroller shall review
applications to approve an investment as a qualified investment in
the order received. The office shall approve or deny each
application not later than the 30th day after receipt of the
application.
(b) If the comptroller intends to deny an application, the
comptroller shall provide notice to the applicant of the basis of
the proposed denial. The applicant may, not later than the 15th day
after receiving the notice, submit a revised application to the
comptroller. The comptroller shall issue a final order approving or
denying the revised application not later than the 30th day after
receipt of the revised application.
(c) The comptroller shall limit the amount of qualified
investments approved to an amount that will result in not more than:
(1) $200 million in total tax credits being claimed
under this subchapter; or
(2) $40 million in tax credits being claimed under
this subchapter in any state fiscal year, other than credits
carried forward from a previous year.
Sec. 171.756. APPROVAL. (a) The comptroller shall provide
a copy of the final order approving an investment as a qualified
investment to the qualified community development entity. The
notice shall include the identity of the taxable entities that are
eligible to claim tax credits in connection with the investment and
the amount that may be claimed by each taxable entity.
(b) The comptroller shall approve a portion of the amount of
a proposed qualified investment if the full amount may not be
approved because of the limit under Section 171.755(c).
(c) If more than one application for approval of a qualified
investment submitted on the same day is found to qualify for
approval and the full amount of all qualified investments under
those applications may not be approved because of the limit under
Section 171.755(c), the comptroller shall approve a pro rata
portion of each of those qualified investments based on the
purchase price.
Sec. 171.757. DURATION OF APPROVAL. The qualified
community development entity must issue the qualified investment in
exchange for cash not later than the 60th day after receiving the
order approving an investment as a qualified investment or the
approval order becomes void.
Sec. 171.758. REPORT OF ISSUANCE OF QUALIFIED INVESTMENT.
The qualified community development entity must provide the
comptroller with evidence of receiving the purchase price of the
qualified investment in cash not later than the 30th business day
after issuance.
Sec. 171.759. USE OF PROCEEDS FROM QUALIFIED INVESTMENTS;
RECORDKEEPING. (a) A qualified community development entity may not
make cash interest payments on a long-term debt security that is a
qualified investment in excess of the entity's operating income for
six years following the issuance of the security.
(b) A qualified community development entity shall keep
detailed records showing the use of proceeds from qualified
investments to fund redevelopment investments.
(c) A business, including its affiliates, may not receive
more than $10 million in redevelopment investments under this
subchapter.
Sec. 171.760. FRANCHISE TAX CREDIT. (a) A taxable entity is
eligible for a credit against the tax imposed under this chapter in
the amount provided by this section and under the conditions and
limitations provided by this subchapter.
(b) A taxable entity is eligible for a credit if the taxable
entity holds a qualified investment on a credit allowance date. The
amount of the credit on the first, second, and third credit
allowance dates is equal to five percent of the purchase price of
the qualified investment. The amount of the credit on the fourth,
fifth, sixth, and seventh credit allowance dates is equal to six
percent of the purchase price of the qualified investment.
(c) The total credit claimed for a report, including the
amount of any carryforward under Subsection (e), may not exceed the
amount of franchise tax due for the report after applying all other
applicable tax credits.
(d) Credits may be applied to the taxable entity's estimated
or final tax payments for the applicable period.
(e) If a taxable entity is eligible for a credit that
exceeds the limitation under Subsection (c), the taxable entity may
carry the unused credit forward for not more than five consecutive
reports. Credits, including credit carryforwards, are considered
to be used in the following order:
(1) a credit carryforward under this section; and
(2) a current year credit.
(f) A taxable entity may sell or transfer the credit allowed
under this section, including the unused amount of a credit
carryforward, to another taxable entity. The taxable entity making
the sale or transfer must report to the comptroller:
(1) the amount of credit sold or transferred;
(2) the identity of the entity making the purchase or
receiving the transfer; and
(3) the reporting period to which the credit applies
and whether the credit is a carryforward credit.
Sec. 171.761. ANNUAL REPORT. A qualified community
development entity that has issued a qualified investment shall,
not later than the 30th day after each credit allowance date, submit
to the comptroller:
(1) a report, verified by the chief executive officer
of the community development entity, describing each redevelopment
investment made by the entity since the last credit allowance date,
including:
(A) a description of the type and amount of each
redevelopment investment; and
(B) the address of the principal location of each
business receiving a redevelopment investment;
(2) bank records, wire transfer records, or similar
documents that provide evidence of the redevelopment investments
made since the last credit allowance date;
(3) a verified statement by the chief financial or
accounting officer of the qualified community development entity
that no redemption or principal repayment was made with respect to
the qualified investment since the previous credit allowance date;
(4) information relating to any recapture of a federal
new markets tax credit involving the qualified community
development entity since the last credit allowance date;
(5) the qualified community development entity's
annual financial statements for the preceding tax year, audited by
an independent certified public accountant;
(6) the number of jobs created and retained by
businesses receiving redevelopment investments made by the
qualified community development entity;
(7) a description of the relationships the qualified
community development entity has established with local economic
development organizations and a summary of the outcomes resulting
from those relationships; and
(8) other information and documentation required by
the comptroller to verify the entity's continued certification as a
qualified community development entity under 26 U.S.C. Section 45D.
Sec. 171.762. AUDITS AND EXAMINATIONS. The comptroller may
conduct audits and examinations to verify compliance with this
subchapter.
Sec. 171.763. RECAPTURE AND PENALTIES. (a) The comptroller
shall direct at any time before December 31, 2026, the recapture of
all or a portion of a tax credit authorized under this subchapter
if:
(1) the federal government recaptures any portion of a
federal new markets tax credit in connection with a qualified
investment or redevelopment investment that was also the basis for
a credit under this subchapter, in which case the recapture under
this section shall be proportional to the recapture by the federal
government;
(2) the qualified community development entity
redeems or makes a principal repayment on a qualified investment
before the seventh credit allowance date, in which case the
recapture under this section for each taxable entity shall be equal
to the taxable entity's total tax credits multiplied by a fraction,
the numerator of which is the redemption or principal repayment
received by the taxable entity and the denominator of which is the
purchase price paid by the taxable entity;
(3) subject to Subsection (b), the qualified community
development entity fails to invest at least 85 percent of the
purchase price in redevelopment investments before the second
credit allowance date;
(4) subject to Subsection (b), the qualified community
development entity fails to maintain at least 85 percent of the
purchase price invested in redevelopment investments until the
seventh credit allowance date;
(5) the qualified community development entity fails
to provide the comptroller's office with information, reports, or
documentation required under this subchapter; or
(6) the comptroller determines that a taxable entity
received tax credits to which the taxable entity was not entitled.
(b) For the purpose of Subsections (a)(3) and (4):
(1) capital or principal recovered from a
redevelopment investment is considered to be invested in the
redevelopment investment for one year following the recovery; and
(2) capital or principal recovered from a
redevelopment investment after the sixth credit allowance date is
considered to remain invested in the redevelopment investment until
the seventh credit allowance date.
(c) The comptroller's office shall provide notice to the
qualified community development entity of a proposed recapture of a
tax credit. The entity may, not later than the 90th day after
receiving the notice, cure a deficiency identified in the notice
and avoid recapture. The comptroller shall issue a final order of
recapture if the entity fails to cure a deficiency on or before the
90th day after receiving the notice. The final order of recapture
shall be provided to the entity and a taxable entity otherwise
authorized to claim the tax credit. The amount recovered shall be
deposited in the general revenue fund.
(d) A person who submits fraudulent information to the
comptroller is liable to the state for the costs associated with the
investigation and prosecution of the fraudulent claim and a penalty
in an amount equal to twice the amount of tax credits claimed by
investors in the entity's qualified investments. This penalty is in
addition to any other penalty that may be imposed by law.
Sec. 171.764. RULES. The comptroller shall adopt rules to
implement this subchapter.
Sec. 171.765. EXPIRATION. (a) This subchapter expires
December 31, 2026.
(b) The expiration of this subchapter does not affect the
carryforward of a credit under Section 171.760(e) or those credits
for which a taxable entity is eligible after the date this
subchapter expires based on a qualified investment made before the
date this subchapter expires.
SECTION 2. This Act applies only to a report originally due
on or after the effective date of this Act.
SECTION 3. This Act takes effect January 1, 2020.