There has been much discussion about building one or more ethane cracking plants within the Marcellus gas footprint. However, there has not been as much discussion of building downstream manufacturing facilities that use products produced at the ethane cracking facility. Recently, the West Virginia Legislature enacted revisions to the tax code to stimulate development of downstream manufacturing facilities in West Virginia. The focus of this article is on those changes.
Senate Bill 465 (2011) amends what is commonly known as the 5 for 10 property tax program for manufacturing businesses. Under this program, if an existing manufacturing facility that has an original cost of $100 million or more adds a capital addition that costs more then $50 million, then, for property tax purposes, the capital addition will be assessed at 60% of its salvage value, which is five percent of the capital addition’s cost. In other words, a $51 million capital addition would have an assessed value of $1.53 million for property tax purposes for a period of 10 years. After this 10-year period expires, the industrial facility will be valued like any other industrial facility, except that air and water pollution control equipment will continue to be assessed at 60% of its salvage value.
If the manufacturing facility with an original cost of $100 million or more is located in a steel, chemical or polymer alliance zone, then the owner of the new manufacturing facility located in the zone that costs more than $50 million may have its new facility certified as a qualified capital addition if the owner joins in a multiparty project with the person owning the manufacturing facility that cost $100 million or more provided the new manufacturing facility:
1. creates additional production capacity of existing or related products or feedstock or derivative products respecting the $100 million manufacturing facility;
2. consists of a facility used to store, handle, process or produce raw materials for the $100 million manufacturing facility;
3. consists of a facility used to store, handle or process natural gas to produce fuel for the generation of steam or electricity for the $100 million manufacturing facility; or
4. consists of a facility that generates steam or electricity for the $100 million manufacturing facility, including but not limited to a facility that converts coal to a gas or liquid for the $100 million manufacturing facility’s use in heating, manufacturing or generation of electricity.
Presently, a chemical alliance zone exists in Marshall County and in Cabell, Kanawha, Putnam and Wayne counties. A polymer alliance zone exists in Jackson, Mason and Wood counties. Because these zones are created by executive order of the Governor, the boundaries of these zones can be modified or new zones created should the need arise.
To encourage downstream manufacturing using products produced by an ethane cracking facility, salvage value property tax treatment is available to a downstream manufacturing facility that costs more than $10 million when the capital addition is to an existing manufacturing facility with an original cost of at least $20 million. The polymer and chemical alliance zone project rules also apply here. One negative aspect of this legislation is that the value of raw land associated with capital additions certified after June 30, 2011, will no longer qualify for salvage value treatment. Capitalized improvements to the land will continue to be eligible for salvage value treatment when they are part of a qualified capital addition and the cost of raw land can still be used when determining whether the capital addition is eligible for salvage value treatment.
To take advantage of the 5 for 10 program, or the new 1 for 2 program, the owner of the capital addition property must file timely with the Tax Commissioner an application to have the capital addition certified as a qualified capital addition. This application must be filed with the Tax Commissioner on or before the due date of the first property report on which capital addition property must be listed. If the capital addition is to existing industrial property appraised by the Tax Commissioner, the capital addition property must be included in the industrial property report that must be filed with the Tax Commissioner on or before August 1st of the assessment year. If the capital addition is on property appraised by the county assessor, the capital addition property must be included in the commercial business property report that must be filed with the county assessor on or before September 1st of the assessment year. What this means is that if land is purchased for the capital addition, then the application for certification as a qualified capital addition must be filed with the Tax Commissioner by the date the land is first required to be returned in a property report for taxation. If the taxpayer already owns the land, then the application for certification as a qualified capital addition must be filed by the date construction work in progress is first returned for taxation in a property report. Construction work in progress is valued during the construction period by ignoring any value added by construction labor until the July 1st assessment date immediately following the date the capital improvement is placed into service.
Once the Tax Commissioner certifies the project as a qualified capital addition, salvage value treatment will be given to the project once the $50 million, or the $10 million, threshold, as applicable, is exceeded. This means that a capital addition that is constructed over a span that includes two or more July 1st assessment dates could have two or more 10-year periods during which salvage value treatment is given to a portion of the capital addition. In other words, the 10-year period could begin before the capital addition is completed and placed into service. Consequently, the date land is acquired for the capital addition or construction begins on the capital addition can be material. For example, if construction can begin on either June 25th or July 2nd, it may be worth delaying the start of construction until July 2nd. Similarly, if purchase of the land can close on either June 25th or July 2nd, it may be worth delaying the closing until July 2nd.
Another important tax benefit available to contractors building manufacturing facilities is the ability to purchase construction materials, supplies and equipment without paying the 6% consumers sales and service tax. The general rule is that contractors must pay tax on all of their purchases for use in business including, but not limited to, construction materials, supplies and equipment that will be incorporated into or consumed in constructing the manufacturing facility. This is done by “borrowing” the manufacturer’s West Virginia direct pay permit number and furnishing the seller of tangible personal property or service with a copy of form CST-286.