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New legislation positions New York to become a leading U.S. chip production hub
2022 PRINDBRF 0407
• Practitioner Insights Commentaries
• September 12, 2022
(September 12, 2022) - Irina Pisareva and Eric Su of Crowell & Moring discuss the details and tax incentives of New York's recently enacted Green CHIPS bill as well the requirements for an eligible project.
On Aug. 11, 2022, Governor Hochul signed the Green CHIPS legislation (S.9467/A.10507) aimed at making New York a hub for semiconductor manufacturing. The Governor and the NYS legislature expect that this legislation together with the incentives introduced in the recent federal CHIPS legislation will create significant increase in job opportunities in New York State.1
Green CHIPS projects that meet certain eligibility conditions and achieve their promised job and investment commitments will be eligible for significant levels of fully refundable tax credits under Empire State Development's Excelsior Jobs Program, a pay-for-performance program in which companies receive tax credits as they meet annual job and investment commitments.
Green CHIPS project defined. To qualify as a Green CHIPS project, a project must meet all of the following criteria:
•is within the semiconductor manufacturing and related equipment and material supplier sector;
•includes sustainability measures to mitigate the project's greenhouse gas emissions impact over its lifetime;
•provides for the payment of not less than federal prevailing wage rates for its project construction — please see discussion below for the explanation of the federal prevailing wage requirement;
•makes commitments to worker and community investment, including through training and education benefits paid by the participant and programs to expand employment opportunity for economically disadvantaged individuals;
•will create at least 500 net new jobs and make at least $3 billion in qualified investment; and
•the participant undertaking a Green CHIPS project shall maintain a Green CHIPS benefit-cost ratio of at least fifteen to one.2
A Green CHIPS project must create at least 500 net new jobs and make at least $3 billion in investment per each 10-year project term, with eligibility for up to 20 years of project incentives.
The tax incentives include:
•Investment tax credit: Up to 5% of project capital expenditures
•R&D tax credit: Up to 8% of R&D expenditures
•Salaries and wages tax credit: Up to 7.5% of salaries and wages expenditures (only applies to first $200,000 of salaries and wages per net new job, to be adjusted for inflation by 4%+)
•Real property taxes/PILOTs tax credit: Eligible for schedule of credits based on amount of real property taxes/PILOT paid (50%, 45%...5%) over 10 years (only applies to one 10-year term)
•Discounted utility service delivery rates: Discounted utility service delivery rates conveyed via private utility
Prevailing wage requirements. The Green CHIPS legislation adopts an approach similar to standards applied to federal government funding on public improvements, invoking the federal prevailing wage mandate under 40 U.S.C.A. §§ 3141-3148 of the Davis Bacon Act, or DBA.
The DBA requires that covered workers performing covered work be paid at local prevailing rates as determined by the United States Secretary of Labor. Prevailing rates of pay generally contain cash wages and supplemental benefits — e.g., fringe or pension benefits.
A contractor or subcontractor can satisfy this requirement by paying the entire pay package through cash wage or by a combination of wages and supplemental benefits. The prevailing rates of wages and fringe benefits are specified in the wage determinations made by the Secretary of Labor.
One type of wage determination is a general wage determination derived through surveys conducted by the United States Department of Labor that are applicable to various building trades in a particular locality. The other is a project-specific determination made through a conformance process in accordance with the requirements of the DBA regulations.
These labor standards requirements will challenge the economic calculus and construction budgets for taxpayers seeking tax credits for their Green CHIPS projects. Careful analysis would be necessary to determine whether the benefits of the tax credit outweigh the additional costs of satisfying the prevailing wage requirements.
Before undertaking such a commitment, the taxpayer should evaluate whether it has or is committed to establishing the requisite management and infrastructure to absorb the additional overhead and responsibilities in appropriately managing a compliant prevailing wage project. Once the taxpayer decides to proceed, the taxpayer should work further with counsel to develop the necessary processes that will ensure meeting the various challenges that are outlined below.
Prevailing rates of pay may be significantly higher than standard nonunion pay packages in private construction. While the State expects most of the projects to be located in Upstate New York, taxpayers may still find that prevailing wages to be higher than nonunion wages in private construction.
Because semiconductor projects may involve work that is cutting edge and novel, determining the proper classification of work for purposes of ascertaining the appropriate prevailing wage rate may also prove challenging.
While the legislation is silent as to whether there may be instances when New York's own prevailing wage law may apply, to the extent that any of the covered project is funded in whole or in part by New York State, taxpayers are recommended to take the prudent approach to ascertain the governing law and applicable wage rates.
The obligation to administer compliance with these labor standards mandates to ensure that workers employed by third parties are properly paid can also be a daunting responsibility. These responsibilities include tasks such as determining the appropriate rates of pay, ensuring that the workers of the contractors and subcontractors are paid on a weekly basis, recording precise hours worked, and taking credit for benefits in accordance with the DBA requirements or other applicable law.
They also include monitoring the proper and timely payment of wages to workers, regularly auditing contractor or subcontractor pay practices, and timely curing any violations. These challenges and obligations only add to taxpayers' risk of exposure to liability for wage underpayments, statutory penalties, and potential private lawsuits in the event of noncompliance as well as credit eligibility challenges by the NYS Department of Taxation and Finance.
Credit caps. The total amount of credits issued by NYS for taxable years 2022 to 2024 for Green Chips projects cannot exceed $500 million per year. One hundred per cent of any amount of tax credits not awarded for a particular taxable year may be used to award credits in another taxable year. Green CHIPS projects would be allowed to claim credits for taxable years up to Jan. 1, 2050. It is not clear whether new credit caps would be assigned to post-2024 years.
Effective date. The Green CHIPS legislation became effective immediately upon being signed into law by Governor Hochul on Aug. 11, 2022.
Expected impact. Although a step in the right direction, it remains to be seen whether the Green CHIPS Act would make New York a competitive alternative to 0 per cent tax states such as Texas and Florida as well as states with lower prevailing wages which may pass similar legislation.
Notes
1 See https://on.ny.gov/3wrJGhu. For discussion of the recent federal CHIPS legislation, please see https://bit.ly/3wsanm9 (Aug. 3, 2022).
2 A "Green CHIPS benefit-cost ratio" is the ratio where the numerator is the sum of: (a) the value of all remuneration projected to be paid for all net new jobs during the period of participation in the program; (b) the value of capital investments to be made by the business enterprise during the period of participation in the program; and (c) all research and development expenditures by the participant in New York State during the period of participation in the program; and the denominator is the amount of total tax benefits that will be used and refunded as well as any state grants provided to the participant.
Irina Pisareva, a partner in Crowell & Moring's tax group in New York, has 25 years of experience advising businesses and investors on transaction tax and cross-border tax matters. She provides tax advice to investment funds, corporations, tax-exempt investors, venture capital and private equity groups, high-net-worth individuals, and family offices. Her areas of interest include energy, technology and biotech companies. She can be reached at [email protected]. Eric Su is a partner in the firm's labor and employment group in New York and represents management in all aspects of labor and employment law, including government investigations and litigation defense involving wage and hour laws. Su is well-versed in federal and state prevailing wage laws, such as the Davis-Bacon and Related Acts and state Davis-Bacon statutes. He can be reached at [email protected]. This article was originally published on Aug. 18, 2022, on the firm's website. Republished with permission.
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