D.C. Puts Out the E-Mat
Joshua Kaufman, Esq. © 2001
Justin Pierce, Esq.
The District of Columbia has put out the welcome E-mat to high-tech companies. The District of Columbia recently passed the New E-Conomy Transformation Act providing real and tangible benefits for high-tech companies who wish to establish their presence in the District of Columbia. This act goes well beyond empty platitudes and promises. It provides concrete realizable bottom-line benefits to entities willing to establish a serious presence in the District of Columbia. After decades of a well-deserved anti-business reputation, the District of Columbia is finally opening its doors to businesses which can provide not only jobs, but the kind of jobs D.C. so desperately needs and desires. D.C.'s version of the Virginia's Dulles corridor and Maryland's Rt. 270 corridor is developing along New York Avenue. In addition to the relocation of high-tech companies, a new Metro stop is under construction to further promote development in the area. D.C. government is hoping to change the fact that only 5% of the region's estimated 12,000 high-tech companies are located in the city. The initiative spearheaded by Councilman David Catania, approved by the council, and signed by the Mayor was transmitted to Congress and officially became the law of the District of Columbia on April 3 , 20001 but is retroactive to January 1, 2001.
The city’s efforts to attract high-tech companies is multifaceted. The Mayor established the Digital Capital Alliance of technology CEOs a year ago who regularly meet with the city's Deputy Mayor. The board of trade has been attempting to generate interest in D.C., as well as the D.C. Technology Council led by Councilman Catania.
Some of the key points of the new statute are that technology companies that are willing to locate into the District of Columbia will be provided with a tax credit in the amount of $7,500 per relocated employee who lives in the District of Columbia and $5,000 per employee tax credit if they live outside of the District of Columbia. Further incentive with regard to employees, is a tax credit of up to 10% of the employees' salaries at qualified high-tech companies for the initial 24 months of employment (up to $5,000 per employee, per year). There will be exemptions from personal property tax, for property owned by a qualified high-tech company for the first 10 years. Qualified high-tech companies will also be exempt from sales and use taxes. Also, there is a reduction of the corporate income tax for high-tech companies. The 9.75% rate effecting other companies will be 6% for high-tech companies. In order the help house the qualified high-tech companies moving into the District of Columbia there will be funding assistance on security deposits on qualifying high-tech companies. This statute also authorizes the Mayor to enter into Master Leases in facilities with the District of Columbia for the purpose of subleasing a premise to qualified companies. In order to help find space, the statute provides that the Mayor and the Superintendent of Schools will undertake an inventory if space to see if there is any unutilized space that can be rented at reasonable below market rates to qualified companies. If school spaces are provided to the companies they must agree to assist the schools through internships and training programs for teachers and students. A 5 year property tax abatement for improvements has also been provided in order to encourage the upgrading of property.
Now for the details:
A qualified high-tech company has been defined in the Act as,
"an individual or entity organized for profit and maintaining an office, headquarter, or base of operation in the District of Columbia. The company must have two or more employees and furthermore, it must derived at least 51% of its gross revenues from:
(I) Internet-related services and sales, including web site design, maintenance, hosting or operation; Internet–related training, consulting, advertising, or promotion services; the development, rental, lease, or sale of Internet-related applications, connectivity, or digital content; or products and services that may be considered e-commerce;
(II) Information an d communication technologies, equipment and systems that involve advance computer software and hardware, data processing visualization technologies, or human interface technologies, whether deployed on the Internet or other electronic or digital media. Such technologies shall include operation and applications software; Internet-related services, including design, strategic planning deployment, and management services and artificial intelligence; computer modeling and simulation; high-level software language; neural networks; processor architecture; animation and full motion video; graphic hardware and software; speech and optical charter recognition; high-volume information storage and retrieval; data compression; and multiplexing, digital signal processing, and spectrum technologies;
(III) Advance materials and processing technologies that involve the development, modification, or improvement of one or more materials or methods to produce devices and structures with improved performance characteristics or special functional attributes, or to activate, speed up , or otherwise alter chemical, biochemical, or medical processes. Such materials and technologies hall include metal alloys; metal matrix and ceramic composites; advanced polymers; thin films; membranes; superconductors; electronic and photonic materials; bioactive materials; bioprocessing; genetic engineering; catalysts; waste emissions reduction; pharmaceuticals; and waste processing technologies;
(IV) Engineering, production biotechnology and defense technologies that involve knowledge-based control systems and architectures; advanced fabrication and design processes, equipment, and tolls; or propulsion, navigation guidance, nautical, aeronautical and astronautical ground and airbone systems, instruments, and equipment. Such technologies shall include: computer-aided design and engineering; computer-integrated manufacturing; robotics and automated equipment; integrated circuit fabrication and test equipment; sensors; biosensors; signal and image processing; medical and scientific instruments; precision machining and forming; biological and genetic research equipment; environmental analysis, remediation, control and, prevention equipment; defense command and control equipment; avionics and controls; guided missile and space vehicle propulsion units; military aircraft; space vehicles; and surveillance, tracking, and defense warning systems; or
(V) Electronic and photonic devices and components for use in producing electronic, optoelectronic, mechanical equipment and products of electronic distribution with interactive media content. Such technologies shall include microprocessors; logic chips; memory chips; lasers; printed circuit board technology; electroluminescent; liquid crystal, plasma, and vacuum fluorescent displays; optical fibers; magnetic and optical information storage; optical instruments, lenses and filters; simplex and duplex data bases; and solar cells."
Exemptions to companies that might otherwise qualify would be individual entities that derive 51% or more of their gross revenues from their operation in the District of Columbia of a retail store or an electornic equipment facility that is primarily occupied or intended to be occupied by electronic computer print equipment that provides electronic data switching transmission or telecommunication functions between computers both inside and outside the facility. This clause seems geared to eliminating "internet warehouses" that do not provide employment, but simply have their equipment based in the District of Columbia.
The relocation costs, described above, for companies bringing employees into the area of the District of Columbia include: reimbursement of actual moving expenses financial made available to employees to assist them in the purchasing of a residence security deposit or lease payments. There are tax credits for retraining costs for qualified disadvantage employees. Qualified disadvantaged employees are defined as District residents who were or are currently recipients of temporary assistance for needy families, released from incarceration within 24 months before the date of employment, were hired and relocated to the District of Columbia, or eligible to claim the welfare-to-work tax credit. Retraining expenditures would include tuition, costs and fees for certain courses worker retraining programs for the D.C. Apprenticeship Council.
In terms of security deposit, the qualified high-tech company would be eligible if it provides training courses to the District of Columbia public school teachers and administrators, internships to D.C. public school students, employment to D.C. public school students in the summer (when school is not in session), technical support or other approved assistance to the school system. Funding will not be provided however, if other financial assistance meeting the requirements of the applicant is available or the Mayor determines the qualified high-tech company will not perform the covenants and conditions of the lease.
To be eligible for property tax abatement, the qualified high-tech company must utilize a building a which at least 50% of its tenants are qualified high-tech companies or the at least 50 % of the arrogated square footage is leased to qualify the high-tech companies using the premises of office or retail space. The qualified high-tech company may be a direct tenant or a subtenant. Care must be exercised because the abatement is revoked immediately if the premises no longer qualifies as an eligible building.
In addition to reducing the corporate tax rate for qualified high-tech companies, the new statute provides that qualified high-tech companies located within a high technology zone (a priority development area designated by the District of Columbia) are not subject to corporate income tax for 5 years after the date that the qualified high-technology company commences business in the high technology development zone.
Finally, the Act allows for qualified high-tech companies to expense certain depreciable business assets. A qualified high-tech company may deduct an amount equal to the lesser of $40,000, or the actual cost of the depreciable business. Furthermore, if the qualified high tech-company is a tenant, the company may deduct the cost of any real property and leasehold improvements.
The e-mat is out, the territory staked out, the metro is coming, the tax breaks are ready, now all we need is for the economy to turn around because DC is ready!
Joshua Kaufman is a partner and Justine Pierce an associate in Venable, Baetjer, Howard & Civiletti's IP group in their Washington DC office. (202) 216.8536.