DEPARTMENT OF COMMUNITY AND ECONOMIC DEVELOPMENT [ 12 PA. CODE CH. 36 ] Film Tax Credit [40 Pa.B. 5816]
[Saturday, October 9, 2010]The Department of Community and Economic Development (Department), under the authority of section 1710-D of the Tax Reform Code of 1971 (act) (72 P. S. § 8701-D), proposes to add Chapter 36 (relating to film production tax credit). The purpose of this proposed rulemaking is to delineate actions necessary for financial compliance with the film production tax credit requirements and the use and transfer of tax credits.
Introduction
The act authorizes the Department to promulgate rules and regulations to interpret and make specific the provisions of the film production tax credit. Section 1710-D of the act states that the rules and regulations are to be promulgated ''for the implementation of the provisions of this article.'' The purpose of Chapter 36 is to provide guidance and clarification concerning the ability to qualify, receive, utilize or transfer film production tax credits.
Fiscal Impact
The proposed rulemaking supplements the existing compliance framework. It does not create adverse fiscal impact and should benefit both the regulated community and State government through a reduction in errors, greater compliance and more efficiency in the administration of the film production tax credit.
Paperwork
The proposed rulemaking will not change existing paperwork requirements.
Regulatory Review
Under section 5(a) of the Regulatory Review Act (71 P. S. § 745.5(a)), on September 23, 2010, the Department submitted a copy of this proposed rulemaking and a copy of a Regulatory Analysis Form to the Independent Regulatory Review Commission (IRRC) and to the Chairpersons of the House Urban Affairs Committee and the Senate Community Economic and Recreational Development Committee. A copy of this material is available to the public upon request.
Under section 5(g) of the Regulatory Review Act, IRRC may convey any comments, recommendations or objections to the proposed rulemaking within 30 days of the close of the public comment period. The comments, recommendations or objections must specify the regulatory review criteria which have not been met. The Regulatory Review Act specifies detailed procedures for review, prior to final publication of the rulemaking, by the Department, the General Assembly and the Governor of comments, recommendations or objections raised.
Effective Date/Sunset Date
The proposed rulemaking will become effective 60 days after final-form publication in the Pennsylvania Bulletin. The regulations will be monitored on a regular basis and updated as needed.
Contact Person
Interested persons are invited to submit in writing, within 30 days from the date of publication of the proposed rulemaking, comments, suggestions or objections to Andrew Tanzer, Assistant Counsel, Office of Chief Counsel, Department of Community and Economic Development, Commonwealth Keystone Building, 4th Floor, 400 North Street, Harrisburg, PA 17120, (717) 720-7317; or Jane Saul, Executive Director, Pennsylvania Film Office, 4th Floor, 400 North Street, Commonwealth Keystone Building, Harrisburg, PA 17120, (717) 783-3456.
AUSTIN J. BURKE,
SecretaryFiscal Note: 4-92. No fiscal impact; (8) recommends adoption.
Annex A TITLE 12. COMMERCE, TRADE AND LOCAL GOVERNMENT PART I. GENERAL ADMINISTRATION Subpart F. FILM PRODUCTION TAX CREDIT Chap.
36. FILM PRODUCTION TAX CREDIT CHAPTER 36. FILM PRODUCTION TAX CREDIT Sec.
36.1. Definitions. 36.2. Application. 36.3. Special circumstances. 36.4. Review. 36.5. Contract. 36.6. Financial compliance. 36.7. Issuance of tax credits. 36.8. Use and transfer of tax credits. § 36.1. Definitions.
The definitions in section 1702-D of the Tax Reform Code of 1971 (act) (72 P. S. § 8702-D), known as the Pennsylvania Film Production Tax Credit Law, are incorporated by reference. The following words and terms, when used in this chapter, have the following meanings, unless context clearly indicates otherwise:
CPA—A certified public accountant.
Pennsylvania Film Office—The office within the Department which administers the tax credit.
Single application for assistance—The Department's application for its funding programs.
§ 36.2. Application.
(a) Taxpayers shall provide the following information and documentation to the Pennsylvania Film Office to be considered for an award of a tax credit:
(1) A completed tax credit application available at the Pennsylvania Film Office web site at http://www.filminpa. com.
(2) A completed Single Application for Assistance available at the Department's web site at http://www.newpa. com. The Single Application of Assistance shall be submitted electronically.
(3) A budget top sheet in a format that provides side-by-side comparison of total production expenses and qualified Pennsylvania production expenses. Expenses not included in the budget will not be eligible for the award of tax credits.
(4) A statement indicating whether financing for the project has been secured or will be secured prior to the planned start date of principal photography in this Commonwealth. If financing is or will be in place, a taxpayer shall provide appropriate documentation and notify the Pennsylvania Film Office of any change in financing prior to completion of the project.
(5) Additional information and documentation requested during an interview, in person or by telephone, with the Pennsylvania Film Office to discuss the application prior to its submission. Interested taxpayers should request an appointment by calling (717) 783-FILM.
(6) Other information or documentation deemed appropriate by the Pennsylvania Film Office.
(b) Applications shall be mailed, faxed or sent by means of email to:
Pennsylvania Film Office
Department of Community and Economic Development
Commonwealth Keystone Building
400 North Street, 4th Floor
Harrisburg, PA 17120-0225
Phone: (717) 783-FILM
Fax: (717) 787-0687
info@filminpa.com§ 36.3. Special circumstances.
(a) Productions lasting more than 12 months. If a film is scheduled to be in production for more than 12 months, the taxpayer may, at the time of application, make a written request that a tax credit be issued on an annual basis rather than upon completion of production. If accepted, the request may not be withdrawn or changed. The Pennsylvania Film Office may grant the request, subject to the following conditions:
(1) The amount of the tax credit to be issued shall be limited to 25% of qualified Pennsylvania production expenses actually incurred during the relevant 12-month period.
(2) The taxpayer shall comply with the financial compliance provisions of this chapter with respect to each tax credit to be issued under § 36.6 (relating to financial compliance).
(b) More than one film. A taxpayer may submit one application for a slate of feature films, that is, three or more films each with a running time of more than 75 minutes. The application must be accompanied by a proposal detailing how the taxpayer will ensure that all of the films will be completed and will qualify for the tax credit.
(c) Large awards. If the total tax credit award for one approved application exceeds 20% of the film production tax credit allocation for that fiscal year, the Pennsylvania Film Office may award the tax credit for that application over succeeding years in each case not to exceed 20% of the allocation for that fiscal year.
§ 36.4. Review.
Applications will be considered in the order in which they are received. Applications will be reviewed for completeness and compliance with the law, regulations and guidelines. The Pennsylvania Film Office may consider the following criteria in its review of applications:
(1) The amount of qualifying Pennsylvania production expenses to be incurred by the taxpayer.
(2) The number of jobs in this Commonwealth to be created by the project.
(3) The number of days shooting in this Commonwealth.
(4) Whether the film is or will be fully financed prior to the start date.
(5) Whether distribution for the film has been secured.
(6) The number of job training opportunities in this Commonwealth to be generated by the film.
(7) Whether post production activity will take place in this Commonwealth.
(8) Other factors as the Pennsylvania Film Office may deem appropriate.
§ 36.5. Contract.
If an application for a tax credit is approved, the Pennsylvania Film Office will prepare and send a contract to the taxpayer. The contract will specify the maximum amount of eligible tax credits and the taxpayer's obligations including the following:
(1) Provide evidence that the taxpayer has registered to do business in this Commonwealth prior to the start date.
(2) Provide evidence that all personal service corporations or loan-out companies engaged by the taxpayer are incorporated in or have registered to do business in this Commonwealth prior to the start date or the date on which the company was engaged, whichever is later.
(3) Provide evidence of the start date. When the taxpayer demonstrates to the satisfaction of the Pennsylvania Film Office that exigent circumstances have caused an unavoidable delay in the commencement of production, the Pennsylvania Film Office may agree to extend the start date by up to an additional 120 days upon receipt of satisfactory evidence that the production will commence within the time of the extension.
(4) Provide the following reports to the Pennsylvania Film Office on a timely basis until completion of the production using the forms provided by the Pennsylvania Film Office:
(i) Projects of less than 3 months duration only need to submit an economic impact report. The economic impact report shall be submitted to the Pennsylvania Film Office within 60 days of completion of the production.
(ii) Projects with a duration of more than 3 months shall submit a monthly report in addition to an economic impact report.
(5) Provide an independently audited report of production expenses and all qualifying Pennsylvania production expenses upon delivery of the completed project to investors. The report shall be prepared in accordance with § 36.3 (relating to special circumstances).
(6) Include with the end credits, in each print and electronic version of the film, an acknowledgement of the support provided by the Pennsylvania Film Office and any applicable regional film office and the logo of the Pennsylvania Film Office.
(7) Other terms and conditions the Pennsylvania Film Office deems appropriate.
§ 36.6. Financial compliance.
(a) Description.
The taxpayer shall submit, through a CPA, an audit or a report on agreed upon procedures within 120 days after completion of film unless a written request for an extension has been submitted to and approved by the Pennsylvania Film Office.
(b) Selection of an independent CPA. The audit or report on agreed upon procedures shall be performed by a properly licensed CPA. Prior approval of the CPA selection is not required unless the taxpayer is notified in writing by the Department.
(c) Audit.
(1) Scope. The audit must include all funds expended on the film under the Department contract and encompass the entire contract period. Other periods may also be specified at the discretion of the Department and the Department reserves the right to designate additional compliance factors.
(2) Components. The audit shall be done in accordance with the standards set forth in the Generally Accepted Auditing Standards, current revision, and include, as a minimum, the following:
(i) Accountant's report.
(ii) Financial statements, including the statement of total qualifying Pennsylvania expenses and total production expenses.
(iii) Notes to the financial statements.
(iv) Report of estimated Sales Tax and individual Gross Income Tax withheld related to the film.
(v) Internal control report.
(vi) Compliance report including all findings (that is, instances of noncompliance or deficiencies in the internal control structure), along with all attendant costs.
(d) Report on agreed upon procedures.
(1) Scope. If the taxpayer chooses to submit a report on agreed upon procedures, the CPA shall first submit a draft engagement letter to the Department before performing the procedures. The engagement letter should include the Department as a signing party and include the following procedures:
(i) The CPA shall apply the agreed-upon procedures to the expense accounts of the taxpayer for the preproduction, production and postproduction periods of the film in accordance with the standards established by the American Institute of Certified Public Accountants. Other periods may also be specified at the discretion of the Department and the Department reserves the right to designate additional compliance factors.
(ii) The CPA shall read and understand Article XVIII of the Tax Reform Code of 1971 (72 P. S. §§ 8701-D—8712-D), known as the Film Production Tax Credit Law, regulations, guidelines and other materials specified by the Pennsylvania Film Office.
(iii) The CPA shall test payments on a sample basis and verify the agreement of: the date the expense was incurred, the payee and the amount of the expense. The CPA shall also inspect the documentation for evidence of the expense being incurred in this Commonwealth if the invoice has been included in the report as a qualified Pennsylvania production expense in accordance with the Film Production Tax Credit Law, regulations and guidelines.
(iv) The CPA shall confirm with the Department of State whether the taxpayer and all loan-out companies involved in the production are registered to do business in this Commonwealth.
(v) The CPA shall calculate the amount of the credit at 25% of the qualified Pennsylvania production expenses.
(vi) The CPA shall review categories of expenses and payroll reports and prepare an estimate of Sales Taxes and individual Gross Income Taxes related to the project.
(2) Components. The agreed upon procedures engagement shall be performed in accordance with the attestation standards established by the American Institute of Certified Public Accountants, and include, at a minimum, the following:
(i) The CPA's report on agreed upon procedures.
(ii) The statement of total qualifying Pennsylvania production expenses and total production expenses and computation of the tax credit.
(iii) A report of estimated Sales Tax and individual Gross Income Tax withheld related to the film.
(iv) A report containing an attestation that the taxpayer met the conditions in the Film Production Tax Credit Law, regulations, guidelines and the other materials provided by the Department.
(e) Economic impact report. In addition to the audit or report on agreed upon procedures, the taxpayer shall submit an economic impact report in the form provided by the Department.
(f) Submission of materials. Three copies of the audit or report on agreed upon procedures, economic impact report, application, engagement letter and award letter shall be submitted to the Pennsylvania Film Office within 120 days after the completion of the film unless a written request for an extension has been submitted to and approved by the Pennsylvania Film Office. The Pennsylvania Film Office will not issue a tax credit certificate until it has received, reviewed and approved the audit or report on agreed upon procedures and the economic impact report.
§ 36.7. Issuance of tax credits.
Tax credit certificates will be issued by the Department upon review and approval of the audit or report of agreed upon procedures, the economic impact report and other information requested by the Pennsylvania Film Office. Provided that the information submitted meets the financial reporting requirements of the regulations, a tax credit certificate will be issued within 45 days of receipt. The amount of the tax credit issued will not exceed the amount requested in the application. Tax credits can only be issued to entities that have a State Tax ID number. Entities not incorporated in this Commonwealth shall register to do business in this Commonwealth to obtain a State Tax ID number.
§ 36.8. Use and transfer of tax credits.
(a) Taxpayer's qualified tax liability. The tax credit shall be applied first to the taxpayer's qualified tax for the taxpayer's tax year in which the tax credit is awarded. The tax credit cannot be applied against the liability until the return for the year has been filed.
(b) Options. If the taxpayer's qualified tax liability is less than the tax credits awarded to it, the taxpayer may do one of the following:
(1) Carry forward the unused portion of the tax credit for a period not to exceed 3 additional tax years and may use the tax credit to offset qualified tax liabilities during those years.
(2) Apply to the Pennsylvania Film Office for approval for the sale, transfer or assignment of all or a portion of the tax credit to another entity for use against qualified tax liabilities.
(c) Tax returns. A taxpayer shall file all required State tax reports and returns for the years up to and including the date of the award letter and pay any balance of State tax due as determined at settlement, assessment or determination by the Department of Revenue before the tax credit can be used and before an application for sale or assignment will be approved.
(d) Transfer application review. Applications for the transfer of all or a portion of the tax credit shall be submitted to the Pennsylvania Film Office for review. If the application is complete in all respects, the Pennsylvania Film Office will approve and forward the application to the Department of Revenue for review and processing.
(e) Effective date of transfer. Subject to the statutory requirements relating to the payment of all outstanding qualified tax liabilities for the year in which the tax credit is awarded, a taxpayer may transfer unused tax credits. The effective taxable year for the transferred tax credits will be the date of approval of the application for transfer by the Department, the tax report filing date or the date the seller becomes compliant, whichever is latest.
(f) Limits. The amount of the tax credit that a transferee may use against any one qualified tax liability may not exceed 50% of the qualified tax liability for the taxable year. A transferee may not carry back or obtain a refund of unused tax credits. After submitting an application to transfer a tax credit, a taxpayer may no longer use that portion of the tax credit to offset a qualified tax liability unless the application is denied by the Pennsylvania Film Office or withdrawn by the taxpayer.
(g) Doing business in this Commonwealth. Tax credits can only be awarded, issued, sold or assigned to entities that have a State Tax ID number. Entities not incorporated in this Commonwealth shall register to do business in this Commonwealth to obtain a State Tax ID number. The Department requires that the taxpayer and all loan-out companies involved in the production are registered to do business in this Commonwealth.
[Pa.B. Doc. No. 10-1932. Filed for public inspection October 8, 2010, 9:00 a.m.]
