Part 1: State Production Incentives

How New England stacks up against the competition

By Emily McNamara, Esq.

Emily McNamara, Esq.  Photo by Claire Folger
Emily McNamara, Esq. Photo by Claire Folger

I’m seated mid-row in the overly air-conditioned auditorium of the Roosevelt Hotel in Hollywood. It’s Day 3 of a conference on “Film Financing” – State Incentives Day. Assembled on stage is a panel of film commissioners and tax credit brokers. For this session, there are no empty chairs. The topic has drawn the full house of film finance attendees – producers, investors, movie execs, ready to take notes on the information to come. Each panelist takes a turn, their talk is heavy with lingo “refund, rebate, first-come, pre-cert, res, non-res, cap, no cap, carryover, carry-forward, sunset, offset…. doc or no doc?”

Backstory: “Runaway Production”

In the 1990’s, the United States was losing one of its original and most profitable industries. The production of movies and television was moving overseas – not for the lure of unique and exotic locations – but for the
straight mathematics of production budgeting. The tax credits offered by foreign governments meant maintaining production value at a lower cost – a sensible and attractive prospect to any industry. Recognizing the economic value of production, in 2004, Congress responded with one effort to curtail the “runaway production” by enacting section 181 of the internal revenue code.(1) But the legislation most successful in reversing the movement overseas came from the individual states.

In 2000, only three states offered any incentive for media production. By 2013, all but six states offer some form of incentive.(2) The individual states and certain “State Incentives” can be credited for reversing a trend
overseas and bringing the industry back home. In return, a state can benefit from the increased economic activity which production brings and inspires. Because there are benefits, there is competition. Any comparison involves
a complicated grid of variables, with no two programs exactly alike. So, which states offer the best incentives?

Incentive Types “Refund, Rebate”

First, the programs vary by “Type of Incentive”. A look at the New England states alone shows some ranges in Type – Tax Credits, Rebates, and Sales Tax Exemptions. The most common Incentive is a business tax credit that productions “earn” for spending on costs incurred in the state (CT, MA, ME, RI), but which vary in percentage rate and earning base.

The New England states earn Tax Credits at rates ranging from 5% (ME) up to 30% (CT). The tax credits come with other incentives – Exemptions on sales tax or hotel tax, or fee-free locations. Other states offer Rebates (ME) or just the Exemptions, alone (VT).

Typically, a production must spend at least a certain amount in the state to qualify for an Incentive program (“Minimum Spend”). What specific expenses constitute the Minimum Spend will vary by Program because certain expenses
will be eligible to earn Incentives (“Qualified Costs”) and others will not. Also, the amount of Incentive a project will earn is subject to multiple, sometimes overlapping, variables, including the type of spending, budget Tiers, the timing of the spending, the specific costs, etc. Part II of the
Series will address those multiple variables, including the important “Residency Requirements”.

“Doc or No Doc?” Qualified Projects

Whether a certain media project is eligible under an Incentives program is determined by the category, meaning, the production must be a “Qualified Project” (e.g., Feature Film, TV Program or Series, Commercials). Most all states exclude productions featuring news, talk and game shows, sporting events, awards shows, fundraising, infomercials, industrials, and “obscene” productions. Some states include Video Games and Digital Animation, while others exclude Documentary and Reality Television.

Back at 10am I was listening intently, sketching state features into a comparison chart. For the most part, the panel is preaching the virtues of the states they represent. It’s now 10:40, the rooms in Los Angeles are too cold and the talk is fading for lack of objectivity. The California Film
Commissioner has my attention when she forthrightly admits that her state has an Annual Cap –there’s some disappointment in the room – but she also reports two years positive ROI and that’s met with approval. I’m planning my escape from the middle row to retrieve a sweater, when someone asks the panel, “What about the other New England states?” Finally. Now someone will tell these 500 people about my own great state – Massachusetts. The Connecticut representative responds to the effect that “Vermont and New Hampshire have
no programs – Rhode Island’s been busy – Massachusetts offers 25%” … “but hasn’t been able to attract any real business.”

What? I raise my hand. Someone please bring me the microphone….

The Massachusetts Incentives

Since 2006, Massachusetts has provided an Incentive (Tax Credits), to encourage the media production business within the state. The Massachusetts Film Incentives were enacted during Governor Romney’s administration prompted by efforts from local business interests and state legislators (see IMAGINE October 2004), and is overseen by the Executive Office of Economic Development. The Department of Revenue (DOR) is responsible fo administrating the program – reviewing applications and issuing the tax credits in the form of Certificates. The MA Incentives been quite successful in attracting outside
motion picture and television production, stimulating industry activity and allowing local companies to be internationally competitive. Between 2006 and 2011, the DOR issued over $300 Million in MA film tax credit Certificates, 3 which represents over $1.3 Billion spending on “Qualified Costs” (i.e., Production & Labor costs incurred in connection with a MA “Qualified Project”).

The MA Incentives offer a production company the ability to earn MA tax credits based on spending, a sales tax exemption, and state fee-free locations. The MA tax credits are issued in the form of Certificates, which may be used to satisfy Massachusetts income tax liabilities (both corporate excise and personal income tax). The Certificate functions like a coupon – redeemable only for paying those tax bills to Massachusetts. The Certificates
are effective for the tax year issued, and any balance may be carried forward up to five years. Accordingly, the film tax credits are valuable to any individual or business who pays taxes in Massachusetts.

How do MA tax credits incentivize out-of-state companies – like a Hollywood studio? A key feature is that the tax credit Certificates are designed to be “Transferable”. The applicant production company may itself be organized and
operated in another state (e.g., CA) and, therefore, has no significant or immediate tax liability to Massachusetts. That production company may transfer/assign the Certificates they earn to a MA taxpayer, who acquires the tax credits to satisfy their own MA tax liabilities – at a discount. Each
transfer is recorded by the DOR. The result is cash realized for the production company and savings for that MA taxpayer.

Back to Hollywood and the Roosevelt Hotel… I stand up, not to leave, but to take the microphone offered me and say something like this, “Massachusetts? We offer a 25% tax credit earn on a $50K minimum spend, Res & Non Res, Caps? No Annual, No Project, No Salary, Fully Transferable, Refundable at .90, No Pre-Cert, Sunset 2023, and yes…Docs.” The audience approves. I sit down and someone pokes me in the back. “So we’ve financed a major vehicle that’s scheduled for MA. So, MA is…good?” With all objectivity, yes, Massachusetts is great.

Entertainment Attorney, Emily McNamara, Esq., is a Boston Entertainment
Attorney, specializing in the business and financial aspects of the media industries. Emily consults to Productions on the Massachusetts Production Incentives and can be reached at [email protected].

(1): IRC Section 181 provides an Investor a full tax deduction for the costs of producing qualified independent film & television project. A taxpayer may deduct 100% of the qualified costs in the calendar year that they are
paid or incurred, rather than capitalizing the costs through depreciation allowances over a period of years. Section 181 expired in 2010 and was recently renewed as part of the “Fiscal Cliff.”

(2): Every U.S. State & Puerto Rico has an active Incentive, except Arizona, Delaware, Iowa, Michigan, New Hampshire, and South Dakota (Michigan will Sunset, New Hampshire Incentives legislation introduced in 2013). Nebraska, Nevada, and North Dakota offer only Hotel Tax Exemptions.

(3): Based on DOR Reports years 2006-2010, including the 2011 estimate of $222m reflected in the 2010 DOR Report.

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