Federal Court Case Threatens State Tax Incentives
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August 2005

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Federal Court Case Threatens State Tax Incentives

By Darlene Cypser, Esq.

While the Colorado General Assembly has once again failed to pass any kind of film and video production tax incentives, a federal court case out of Ohio could possibly invalidate state tax incentives used to induce companies to locate production operations in one state versus another, whether those incentives are intended to encourage the location of a factory or production of a truck commercial.

The 6th Circuit Federal Court of Appeals ruled in Cuno v. DaimlerChrysler, Inc., that an Ohio investment tax credit that granted a corporation a credit against the state’s corporate franchise tax if the corporation installed new equipment within the state violated the Commerce Clause of the U.S. Constitution by discriminating against interstate commerce. In the review of the law in its published opinion the Court of Appeals stated that the Commerce Clause does not prevent states from structuring their tax systems to encourage the growth of local industry as long as the state tax system does not discriminatorily tax business operations performed in other states. In this context, discrimination means different treatment of in-state and out-of-state economic interests. The court cited a U.S. Supreme Court case, Boston Stock Exchange v. State Tax Commissioner, in which the high court invalidated securities transfer tax provision which would induce a seller to trade with a New York broker in order to reduce its tax liability. The 6th Circuit Court of Appeals concluded that a tax credit intended to encourage further investment in-state at the expense of development in other states was unconstitutional.

While this ruling has created the greatest stir among manufacturing interests hoping to benefit from incentives that states offer them for building new factories and creating new jobs in the state, it also could have an impact on the tax incentives offered to film and video production companies to shoot in their state. There can be no doubt that such tax incentives are intended to benefit the local economy of the state at the expense of other states. This could mean trouble for states that are dependent on tax incentives to draw production, but it could benefit states like Colorado that have lower taxes and lower costs of production even without creating special tax incentives.

Darlene A. Cypser is a movie producer and sales agent currently working with Inferno Film Productions, LLC in Littleton, CO. She is a licensed attorney in both Colorado and New York with a Juris Doctor degree from the University of Oklahoma. She is a member of the Colorado Film & Video Association. She may be reached at 303-587-9792.

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