PA 07-236—sHB 6500

Commerce Committee

Finance, Revenue and Bonding Committee

Appropriations Committee

Higher Education and Employment Advancement Committee

AN ACT EXPANDING CONNECTICUT'S FILM INDUSTRY

SUMMARY: This act establishes new transferable credits against the corporation and insurance premium taxes for (1) investments in state-certified film and digital media infrastructure projects and (2) digital animation productions. Digital animation production credits are limited to an aggregate of $15 million per year. The new credits are administered by the Connecticut Commission on Culture and Tourism (CCCT) and are modeled on the existing state tax credit for film and digital media production expenses. The act also makes several changes in the existing film credit, including applying it against the insurance premium tax as well as the corporation tax and changing the types of productions and expenses that are eligible.

For all three credits, the act (1) allows an eligible entity to apply for and receive credits during production or while building an infrastructure project; (2) allows those who purchase credits from their original recipients to sell them to others in their turn and allows the credits to change hands up to three times; (3) imposes financial penalties for deliberately submitting false information to receive credits; and (4) once credit vouchers are issued, limits the state's power to further audit or review the expenses on which they are based and requires any inflated or inaccurate credits to be recovered from their original recipients rather than any transferees.

The act also:

1. requires the Office of Workforce Competitiveness to establish a film industry workforce training program;

2. exempts certain payments to media payroll services companies from the sales tax;

3. explicitly exempts film and television scripts and detailed production budgets from the Freedom of Information Act (FOIA) as trade secrets; and

4. authorizes Connecticut Innovations, Inc. (CII) to provide financial help for those developing and building film and digital media industry infrastructure projects.

EFFECTIVE DATE: July 1, 2007, except for the FOIA exemption, which is effective on passage. The new tax credits and the changes in the existing film production credit apply to income years starting on or after January 1, 2007.

§ 1 — FILM PRODUCTION TAX CREDIT CHANGES

Tax Credit

Connecticut provides a transferable credit equal to 30% of eligible film and digital media production expenses that exceed $50,000. The act allows the credit to apply against the insurance premium tax as well as the corporation tax.

Qualified Productions

By law, only qualified productions are eligible for credits. The act makes videos, sound recordings, and certain interactive websites explicitly eligible.

Eligible sound recordings are music, poetry, and spoken-word performance recordings. Such recordings are not eligible if recorded as part of a movie, video, theatrical production, t. v. news coverage, or athletic event. Eligible interactive websites are those (1) whose production costs exceed $500,000 per year and (2) are primarily (a) interactive games or end-user applications or (b) animation, simulation, sound, graphics, story lines, or video created or converted from another format (“repurposed”) for Internet distribution. Websites used primarily for institutional, private, industrial, retail, wholesale marketing or promotion, or that contain obscene content are not eligible.

Under prior law, ongoing productions created primarily as news, weather, or financial market reports were ineligible for credits. The act limits the exclusion for such programs to television programs of those types. It also makes the following types of productions ineligible:

1. current or sporting events;

2. awards shows and other gala events;

3. productions whose sole purpose is fundraising;

4. productions used for corporate training or in-house corporate advertising and similar productions; and

5. long-form productions that primarily market a product or service. (It is not clear how this type of production differs from an “infomercial,” a type of production explicitly allowed as a qualified production under a provision of the existing law that the act leaves unchanged. )

Eligible and Ineligible Expenses

In and Out-of-State Expenses. Under prior law, a company could claim a credit for eligible production expenses exceeding $50,000, but only if the expenses were incurred in Connecticut. From January 1, 2009 to January 1, 2012, the act allows 50% of expenses incurred outside the state to count towards the credit if they are used in the state. On and after January 1, 2012, no expenses incurred out of state will count towards the credit. (PA 07-4, June Special Session, restores the requirement that all eligible expenses must be incurred in Connecticut. )

Intellectual Property. The act excludes all expenses for purchasing intellectual property rights. Intellectual property expenses were previously eligible if (1) the intellectual property was produced primarily in Connecticut, (2) 75% of the qualified production based on it is produced in Connecticut, and (3) the cost of optioning or buying it is less than 35% of the production's Connecticut costs and expenses.

Star Compensation. Starting January 1, 2008, the act also excludes compensation over $15 million paid to any individual working on the production or to any entity that represents such an individual. There was formerly no limit on individual star compensation eligible for a credit.

Compensation of Other Performers. The act removes limits on credit-eligible talent fees for extras, principal day players, and atmosphere as defined by the Screen Actors' Guild (SAG). The former limit for such fees was double the scale amounts under SAG's current collective bargaining agreement.

Production Equipment. The act allows a credit for production equipment expenses only if they are not eligible for the film infrastructure credit the act establishes (see below).

Obscene Productions

Under both prior law and the act, productions containing obscene material or performances are ineligible for a tax credit. The act changes the standard for determining obscenity from a state to a federal one.

Under prior law, a production was ineligible if (1) taken as a whole, it appealed predominantly to prurient interest; (2) it showed or described a sexual act in a patently offensive way; and (3) taken as a whole, it lacked serious literary, artistic, educational, political, or scientific value (CGS § 53a-193).

Under the act, a production is ineligible if it contains obscene material or performances on which, by federal law, producers must keep certain records. Federal law requires producers to keep records on performers in productions made after November 1, 1990 that (1) include visual depictions of actual, as opposed to simulated, sexually explicit conduct and (2) are either themselves shipped or transported in interstate commerce or made with material so shipped or transported (18 USC § 2257).

Tax Credit Vouchers

The act allows a production company to apply for and receive credits on an annual basis as a production is continuing, instead of only after it is finished.

Under prior law, a company had to apply to the CCCT for a production tax credit eligibility certificate within 90 days after incurring its first production expenses. Then, no later than 90 days after incurring its last expenses, it had apply for the actual credit certificate on which CCCT had to enter a credit amount. The act keeps these two deadlines but also allows companies to apply for, and receive, tax credit vouchers on annual basis while the production is in progress instead of after it is finished. It requires a company to wait at least three months after submitting its eligibility application before applying for a credit for its expenses up to that time. It also allows a company to apply for credits within 90 days after the end of its annual period.

The act changes the tax credit certificates to tax credit vouchers and requires CCCT to deduct the credits issued during production from the company's final credit amount. It allows expenses to be listed only once and bars the same expenses from being included in more than one claim for a production credit or for an infrastructure or digital animation production credit.

The act allows taxpayers to claim credits in the income year when the expenses were incurred, instead of requiring them to wait until the CCCT issues a final certification for the production.

Credit Transfers

By law, production companies may sell or otherwise transfer their credits. This act allows a transferee to sell the credits again after a first transfer but limits the total number of transfers to three. It requires the parties to the second and third transfers to jointly notify CCCT, supplying the same information and using the same procedures as are already required for the initial transfers.

Financial Penalty

The act imposes a financial penalty equal to the credit amount on any qualified production company that deliberately submits false or fraudulent information to the CCCT for purposes of the credit. The new penalty is in addition to other penalties already provided by law.

Limits on Post-Certification Remedies

Once a credit voucher is issued, the act limits the CCCT's and Department of Revenue Services' (DRS) power to further audit or examine the production expenses on which the credits are based unless there is the possibility of material misrepresentation or fraud.

If CCCT or DRS determines, after issuing a credit voucher, that a production company made material misrepresentations or committed fraud in its expense report and that those actions resulted in inflated or inaccurate tax credits, the act gives the agencies the sole remedy of recovering the credits from the production company itself and not from any other company to which the production company transferred the credits. The act bars the agencies from requiring that credits be recaptured, disallowed, recovered, reduced, forfeited, decertified, or subject to any other remedy that reduces or limits the credit amounts stated on the voucher.

The act applies the same post-certification remedy restrictions to the film infrastructure and digital animation production tax credits it establishes (see below).

§ 2 — FILM INFRASTRUCTURE INVESTMENT TAX CREDIT

State-Certified Projects

The act establishes a transferable credit against the corporation and insurance premium taxes for investments in capital projects for basic buildings, facilities, or infrastructure that the film and digital media industry needs to function in Connecticut. Projects must be state-certified. The entity that undertakes the project must (1) comply with regulations the act requires CCCT to adopt in consultation with the DRS commissioner; (2) be authorized to do business in Connecticut; (3) not have (a) defaulted on any Connecticut state loan or loan guarantee or (b) had any obligation to repay public funds discharged because of bankruptcy; and (4) be approved for an infrastructure credit by CCCT.

Tax Credits

As table 1 shows, credit amounts depend on the infrastructure project's costs.

Table 1: Determining Credit Amounts

The act allows companies that receive tax credits to sell or transfer them and allows those who buy them to sell them to other eligible companies. The maximum number of such transfers is three. Taxpayers holding credits can only claim them for the income year in which they made infrastructure expenditures. Credits are not refundable. Excess credits can be carried forward for three income years.

Infrastructure credit buyers and sellers must jointly notify CCCT of a transfer and supply the same information as for a production credit transfer.

Eligible Expenses

All money spent on a capital project for leased or purchased film, digital media, television, or video production buildings, facilities, and installations is eligible for an infrastructure credit under the act. Eligible expenses include those necessary for (1) development, production, pre- and post-production, and distribution equipment and system access; (2) project development, such as design and professional consulting fees and transaction costs; and (3) fixtures and other equipment.

Credit Application Procedure

The process for applying for infrastructure credits is similar to the film production credit application and issuance process. The entity that undertakes the project must apply to CCCT within 90 days after incurring its first expenses for the project. The applicant must give CCCT the information it requires to determine if the project is eligible for a credit, including, at least, a detailed project description, preliminary budget, and estimated completion date.

CCCT can require an independent audit of project costs and expenses before certification. If it determines a project is eligible, it must indicate the project costs and issue a tax credit certification letter for investors showing the available credits. CCCT must give the DRS commissioner a copy of the letter if the commissioner asks for it.

The act bars the CCCT from issuing a tax credit voucher based on the certification letter until the project is at least 60% complete. Before it issues the voucher, the CCCT must receive a progress report from the entity building the project and an estimated completion date. The commission can also require an independent audit of the project costs and spending before issuing a voucher.

Once the CCCT issues a voucher for an infrastructure credit, the act imposes the same restrictions on the state's audit and tax credit recapture authority as it imposes for the production and digital animation credits.

§ 3 — DIGITAL ANIMATION PRODUCTION CREDIT

The act establishes a separate transferable tax credit for digital animation production activity, which it defines as developing and producing computer-generated animation content for public exhibition and distribution. The credit is equal to 30% of eligible digital animation production expenses over $50,000 for any income year starting on or after January 1, 2007. It applies against the corporation and insurance premium taxes.

To qualify for a credit, a company must (1) be exclusively engaged in the production activity, (2) maintain a studio in Connecticut, (3) employ at least 200 full-time employees (permanent, non-seasonal employees required to work at least 35 hours a week), and (4) be certified by CCCT and comply with its regulations. The act limits aggregate credits that CCCT may reserve to $15 million per year. A company that receives a digital animation credit is not eligible to apply for or receive a film production credit.

The digital animation credit has the same application, transfer, post-certification remedy, and other requirements as the overall film and digital media production credit, with the following exceptions.

1. The act requires eligible digital animation production expenses to be incurred in Connecticut.

2. It makes intellectual property purchase expenses eligible for a credit, if they are less than 35% of the digital animation production company's expenses or costs in any income year.

3. It makes expenses for the following additional types of costs explicitly eligible: actors, voice talent, rent, utilities, insurance, administrative and systems support, and short film production and distribution.

4. It limits the frequency of a digital animation company's applications to CCCT for credit vouchers to twice during the company's income year.

§ 4 — ASSISTANCE FROM CII

The act expands CII's purposes to include research and development of new businesses as well as of new products and technologies. It also allows CII to provide financial help for people developing basic buildings, facilities, or infrastructure that the film and digital media industry needs to function in Connecticut.

§ 5 — FREEDOM OF INFORMATION ACT EXEMPTION

The act exempts film and television scripts and detailed production budgets from the Freedom of Information Act (FOIA) as trade secrets if they meet the existing requirements that they (1) derive independent actual or potential economic value from being kept secret from those who could derive economic value from their disclosure or use and (2) are subject to reasonable efforts to maintain their secrecy. The FOIA already exempts “cost data” from disclosure.

§ 6 — FILM INDUSTRY WORKFORCE TRAINING PROGRAM

The act requires the Office of Workforce Competitiveness (OWC), in consultation with the labor, education, and economic and community development commissioners and the CCCT, to establish a program to develop a trained film industry workforce in Connecticut. The training program must have (1) an unpaid internship program for high school and college students, (2) a production assistant training program for state residents, and (3) a workforce training program that includes classroom and on-set training and mentoring.

OWC must establish participation guidelines for the program by September 28, 2007 and submit a status report on it by January 1, 2008 to the Connecticut Employment and Training Commission and the Commerce and Higher Education committees.

§7-9 — SALES TAX EXEMPTION

The act exempts separately stated charges for compensation, fringe benefits, workers' compensation, and payroll taxes or assessments paid to a media payroll services company from the 6% sales tax. Under the act, a “media payroll services company” is one whose principal business is managing and paying compensation, benefits, and payroll taxes and assessments to a film or digital media production company eligible for a film production tax credit.

BACKGROUND

Related Act

PA 07-4, June Special Session, makes two changes in the film production tax credit and the digital animation production tax credits in this act. First, it restores a requirement that the 30% credit for qualifying film production expenses applies only to production expenses and costs incurred in Connecticut. Second, it requires a film production or digital animation company applying for a production or digital animation tax credit voucher, respectively, to provide whatever independent certification of the amount of its production expenses and costs the CCCT may require.

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