UPDATE ON CONSTITUTIONALITY OF FILM & VIDEO STATE TAX INCENTIVES
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February 2006

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UPDATE ON CONSTITUTIONALITY OF FILM & VIDEO STATE TAX INCENTIVES



As was reported in Advertising & Marketing Review last year (August 2005), the 6th Circuit Federal Court of Appeals ruled in Cuno v. DaimlerChrysler, Inc., that an Ohio law 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. The Court of Appeals stated that a tax credit intended to encourage further investment in-state at the expense of development in other states was unconstitutional. This ruling could threaten state tax incentives offered by many states to encourage film and video production in their states. On September 27, 2005, the U.S. Supreme Court agreed to review the case. In addition there is a bill pending in the U.S. Congress on this issue called the Economic Development Act of 2005 (HR
2471).

While Colorado does not currently have any state production tax incentives in place, it is important for Coloradans to keep an eye on this issue because its resolution may affect Colorado's competitiveness in the film and video production market either by abolishing all state tax incentives or by defining the form in which tax incentives are permissible under federal law.

Some analysts have criticized the Cuno decision for being overly broad while others claim it did not go far enough. Cuno struck down incentives in the form of tax credits while leaving in place incentives that take the form of cash subsidies unrelated to taxes paid. This uneven approach does little to stop economic bidding wars between the states that some claim are needlessly draining funds from essential programs and destabilize jobs. It could merely cause some states to modify the language of their incentives and lead to further litigation on the question. The U.S. Supreme Court could uphold the Cuno decision
as it exists or issue a narrow ruling on the case itself or broadly strike down all competitive state tax incentives. The stakes therefore are high. Amicus Curiae briefs have been filed with the U.S. Supreme Court by the Council on State Taxation, the National Association of Manufacturers, the Tax Foundation and several other groups.

At the same time Congress is considering HR 2471 which states: "Congress hereby exercises its power under Article I, Section 8, Clause 3 of the United States Constitution to regulate commerce among the several States by authorizing any State to provide to any person for economic development purposes tax incentives that otherwise would be the cause or source of discrimination against interstate commerce under the Commerce Clause of the United States Constitution, except as otherwise provided by law."

The bill then goes on to list some tax incentives that are not protected by the act including "any tax incentive which...is reduced or eliminated as a direct result of an increase in out-of-State activity by the recipient of the tax incentive." This would seem to mean any tax incentives that require a certain percentage of a production to be completed within a state would not be protected under this act. But the "limitations" and "definitions" in the bill are somewhat confusing and are likely to lead to additional litigation if the legislation is passed in that form.

There is a great deal of uncertainty about how the newly constituted U.S. Supreme Court will rule on this issue and whether Congress will stay its hand until after it does. Stay tuned.

Darlene Cypser is an attorney licensed in both Colorado and New York with an extensive background in federal tax law. She also is a producer and movie sales agent. Her series of "Pocket Tax Guides," including the "Film & Video Pocket Tax Guide," are available at: www.foolscap-quill.com



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