EV Battery and Supply Chain Have Substantial Economic Development Incentive Opportunities

EV companies considering a supply chain investment need to negotiate for economic development incentives.  All states will use economic development incentives to attract EV suppliers but Ohio offers a worthy model for review.  Ohio offers extended local property tax abatements and Tax Increment Financing (TIF), construction materials sales tax exemptions, and special state economic development tax credits to “megaprojects” as well as their suppliers.  The three major Ohio economic development programs are enhanced by the Ohio Megaproject Program.

Ohio Jobs Creation Tax Credit (JCTC). The JCTC is a refundable and performance-based tax credit calculated as a percent of the created payroll and applied toward the company’s commercial activity tax liability. Should the amount of the credit exceed the company’s commercial activity tax liability for any given year, the difference is refunded. Companies creating at least 10 jobs (within three years) with a minimum annual payroll of $660,000 and that pay at least 150 percent of the federal minimum wage are eligible for the credit; however, they must apply for the credit before committing to a project. The Ohio Tax Credit Authority must approve applicants before hiring begins. The JCTC is Ohio’s major economic development tax credit program, which is a competitively awarded, refundable tax credit against any taxes a company pays to the state of Ohio.

Ohio Enterprise Zones. Counties and municipal corporations may designate areas within the county or municipal corporation as “enterprise zones.” After the EZ designation is approved by the Director of Development Services, the county or municipal corporation may then enter into enterprise zone agreements with businesses to foster economic development in the zone. Under an enterprise zone agreement, the business agrees to establish or expand within the enterprise zone or to relocate its operations to the zone in exchange for tax exemptions for the development’s increased property value and other incentives. In general, a school board of the district in which an EZ is located is required to approve any exemption of more than 75% of the property’s increased value or an exemption for a period of years more than ten.

Ohio Community Reinvestment Area. Ohio’s CRA law authorizes counties and municipal corporations to designate certain areas as “community reinvestment areas” to encourage new construction or the remodeling of existing structures. Like an EZ, after a CRA is approved by the Director of the Ohio Department of Development, the county or municipal corporation may agree with a business exempting the increased value of new construction or remodeling of a commercial or industrial structure in the CRA in exchange for the creation or retention of jobs at the structure. Unlike an EZ, residential construction and remodeling may also qualify for a CRA exemption, but no agreement is required for residential exemptions. Before commercial or industrial property may receive a CRA exemption, the exemption must be approved by the school board of the district in which the property is located, unless the exemption is for less than 50% of the property’s increased value. Under current law, EZ and CRA exemptions are limited to no more than a 15-year term.

Ohio Commercial Activity Tax. The commercial activity tax (CAT) is an annual tax imposed on the privilege of doing business in Ohio, measured by gross receipts from business activities in Ohio. Businesses with Ohio taxable gross receipts of $150,000 or more per calendar year must register for the CAT, file all the applicable returns, and make all corresponding payments. The state of Ohio created the CAT as an alternative to a corporate income tax which was eliminated when the CAT was created.

The Ohio Megaproject Program creates several special tax incentives for operators and certain suppliers of a “megaproject,” i.e., a large-scale development that meets certain investment or payroll thresholds. Specifically, the bill increases the maximum number of years, from 15 to 30, over which the operator or supplier may receive an Ohio Job Creation Tax Credit (JCTC), authorizes a megaproject supplier’s JCTC to be wholly or partially allocated to the megaproject’s operator, authorizes a megaproject supplier, in calculating its commercial activity tax, to exclude its gross receipts from sales to a megaproject operator, and authorizes local governments to grant a 30-year CRA or EZ property tax exemption to a megaproject or property owned by a megaproject supplier and that has been awarded a JCTC. In addition to the megaproject’s operator, certain suppliers of a megaproject are eligible for the program’s special incentives. Specifically, any business that sells tangible private property may qualify for the incentives if it satisfies both of the following requirements: the business makes at least $100 M in fixed-asset investments in Ohio, and the business creates at least $10 M in annual Ohio employee payroll and maintains that level of payroll throughout the term of the JCTC.

Ohio also offers substantial economic development incentives to megaproject suppliers. Ohio established specialized criteria by which suppliers of a semiconductor wafer manufacturing megaproject may qualify as a “megaproject supplier” for purposes of some, but not all, of the megaproject tax incentives. Such a supplier qualifies, notwithstanding the payroll and investment thresholds required by continuing law, so long as the supplier sells the tangible private property that underwent “substantial manufacturing, assembly, or processing” in Ohio directly to the operator of a semiconductor wafer manufacturing megaproject for use at the project site.

Megaproject suppliers that qualify under Ohio’s Megaproject Program’s specialized pathway, and that do not meet the general payroll and investment requirements, qualify for the megaproject supplier CAT exclusion and the extended, 30-year EZ property tax exemption. However, such suppliers are ineligible for the extended, 30-year JCTC or the extended, 30-year CRA property tax exemption – the general, 15-year cap on the incentives applies. Ohio House Bill 687 also modifies the traditional pathway by which suppliers may qualify for megaproject tax incentives, by requiring that property sold by such a supplier must be used at the site of the megaproject. Current law states that the sale must be made to a megaproject operator but includes no restrictions as to where the property is used. Furthermore, the bill changes the way the investment and payroll thresholds are enforced. Current law states that a supplier must meet the required thresholds, whereas the bill states that the supplier must agree to meet the required thresholds as part of the supplier’s JCTC agreement. The megaproject suppliers that do not meet the required thresholds do not receive certificates of compliance for the associated tax incentives.

Ohio’s Megaproject Program that to qualify for the existing megaproject supplier exclusion, the tangible private property sold to the megaproject operator must be used at the site of the megaproject. It also requires that the sale occur during a period in which the megaproject is subject to a valid JCTC agreement. The bill clarifies that only megaproject suppliers that qualify for the incentive under the general payroll and investment criteria must hold, as a prerequisite of claiming the exclusion, a certificate that validates compliance with the supplier’s JCTC agreement. Megaproject suppliers that qualify for the exclusion based only on the bill’s new semiconductor wafer manufacturing pathway, but do not meet the payroll or investment thresholds, need not obtain such a certificate.

Ohio’s Megaproject Program also specifies that, concerning a CRA exemption, only megaproject suppliers that meet the payroll and investment criteria are eligible for a 30-year exemption. Megaproject suppliers that qualify based on the bill’s new semiconductor wafer manufacturing pathway, but that do not meet those criteria, may still receive a CRA exemption, but the term is limited to 15 years. All megaproject operators, including operators of semiconductor wafer manufacturing megaprojects, are eligible for an extended, 30-year CRA exemption, at the discretion of the granting county or municipal corporation.

Ohio’s Megaproject Program positions the Buckeye State to compete globally for the next large-scale, transformational global corporate site location project through a more transparent and predictable process and the recent changes by the Ohio General Assembly support the implementation of the $2 B incentive package offered by the state of Ohio to recruit Intel and its supply chain.

The EV supply chain is a global marketplace. Companies considering investments tied to an existing or planned EV battery or assembly plant will often make a Foreign Direct Investment (FDI) into a U.S. location.  Tariffs applied by the United States on this industry are likely to make this investment more attractive in the United States as well.

Contact Wade Williams at wwilliams@montrosegroupllc.com if you have any questions regarding the EV industry or other corporate site location matters.