News & Insights

Larger Tax Burdens Loom for Qualified High-Technology Companies as Washington, D.C. Discontinues Tax Benefits

Tax Development Sep 02, 2020

Larger Tax Burdens Loom for Qualified High-Technology Companies as Washington, D.C. Discontinues Tax BenefitsAs COVID-19 continues to adversely impact the economy, most businesses are struggling to survive and stay open. They are enduring significant declines in revenue, diminished investment returns, and even concerns over their ability to pay basic operating expenses, including salaries, rent, mortgages, taxes, and the like. At such a time, many governments are looking to give business relief by lowering tax burdens, particularly to businesses that have worked hard to attract to their city. However, this is not true for the District of Columbia. The Mayor and City Council have repealed the tax benefits previously provided to Qualified High-Technology Companies (QHTC) in Washington, D.C.

With its recent approval of the Fiscal Year 2020 budget, the DC City Council voted to sunset the slate of incentives established two decades ago to lure QHTCs and their high-paying, innovative jobs to the District. When the new E-Conomy Transformation Act of 2000 was enacted, qualifying QHTCs became eligible for benefits such as:

  • Ten-year business personal property tax exemption
  • Five-year corporate franchise tax exemption (or up to $15,000,000, whichever is earlier)
  • Thereafter a reduced corporate franchise tax rate
  • Employee relocation, new hire, and retraining tax credits (combining up to $35,000 per employee, per year)

QHTCs had to meet each of the following criteria:

  • Lease or own an office in the District of Columbia
  • Derive at least 51% of its gross DC revenue from at least one permitted high-technology activity (e.g., website design, software development, data processing, etc.)
  • Have two or more qualified employees in the District

While the requirements for a QHTC have repeatedly been subject to change and litigation, the benefits of QHTC designation have largely remained consistent and attractive, until now.

The impact of the repeal of the QHTC’s tax benefits include:

  • Loss of the business personal property tax exemption, immediately exposing companies to the full 3.4% tax rate
  • Loss of both corporate franchise tax exemption and the subsequently reduced rate of 6%, immediately exposing firms to the higher 8.25% rate
  • Increase in the number of required DC-based employees from 2 to 10 employees
  • Loss of all employee relocation tax credits and a reduction in employee retraining tax credits

According to the Office of the Chief Financial Officer, the District projects the impact of this tax change on business personal property tax and franchise tax alone to result in increased annual taxes of $28,159,000 in Fiscal Year 2021, rising to $37,644,000 annually for the four subsequent years. This $30–40 million increase in annual taxes comes at the direct expense of QHTCs, once the darlings of the DC Mayor and City Council’s high-tech growth policies. 

The repeal of this targeted tax status and benefit suggests that the District’s leaders have abandoned their previous campaign to attract innovative industries and their high-paying jobs. This stands in stark contrast to the aggressive policies and tax benefits being enjoyed by companies across the Potomac River in Northern Virginia. With this welcoming environment, it is no surprise that companies such as Amazon have chosen Northern Virginia as their second home, and why some 70% of the world’s internet traffic now passes through data centers located in the state. Virginia continues to shine as an example of effective use of tax incentives to build a sort of Silicon West in the Mid-Atlantic, a movement the District further shuts itself out of with the repeal of the QHTC tax benefits.

Ryan’s local Metro DC team has been involved with this tax incentive and its application from its inception. Please do not hesitate to contact them for further insights as to how this repeal will impact your local taxation and how that negative impact can be mitigated.

TECHNICAL INFORMATION CONTACTS:

Michael Allen
Principal
Ryan
571.481.9400
michael.allen@ryan.com

Cutchin Powell
Principal
Ryan
202.470.3094
cutchin.powell@ryan.com

Steve Thompson
Principal
Ryan
202.470.3102
steve.thompson@ryan.com

The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals. For additional information about this topic, please contact us at info@ryan.com.