Experts are encouraging companies with tax incentive agreements to check on their performance objectives and consider whether to seek relief under "force majeure" in light of the coronavirus pandemic.
Nearly every state has ordered some form of restriction or closure on businesses. Most have ordered restrictions on dining-in at restaurants and bars, and over 15 have turned to closing all nonessential businesses. As of March 24, Oklahoma remains the exception, having restricted neither on-site dining and drinking nor closed businesses.
In the wake of the many closures affecting businesses and government functions, many states have opted to provide relief by extending tax return filing deadlines and waiving interest and penalties on late payments. However, tax incentive agreements can also have deadlines involving provisions regarding payroll, investment, and clawback to remediate any breach of contract.
In a March 23 client alert, the firm Vorys, Sater, Seymour and Pease LLP reminded companies to look over their obligations under their tax incentive contracts.
“Our clients are more focused on the immediate issues right now, but we’ve been through this before with downturns. I expect that, like what happened in late 2008 and 2009, we will be getting phone calls from businesses that are unable to meet performance targets because of events beyond their control,” Scott Ziance, a partner with the firm, told Tax Notes March 24.
Ziance estimates that around half of the tax incentive agreements he sees have provisions that account for extraordinary circumstances and allow some measure of relief. Those provisions may be called “force majeure” or “market conditions,” and they allow businesses to be excused, often temporarily, from meeting their obligations due to forces outside of their control.
Force majeure — translated as "superior force" — provisions typically will allow one party to limit its liability because of unforeseen events. These events can include “acts of God,” war, or terrorism, and would likely apply to forced closures in the face of a pandemic, Ziance said.
In the other half of agreements, local or state authorities are often given a choice in whether to exercise a clawback of grants or tax breaks, or to temporarily delay performance obligations.
Some agreements adjust automatically with performance-based measures, and companies get a tax credit based on a percentage of their payroll. In those types of agreements, force majeure provisions are not needed.
“In situations where there are grants, big upfront investment, or tax abatements, it’s more nuanced, and there are more approaches of how to address an inability to meet a performance benchmark,” Ziance said. “There’s what’s written on the four corners of the agreement and what you can go discuss, and the results from that will differ from community to community and state to state, based on the circumstances.”
The most common type of adjustment to a tax incentive agreement is a timing adjustment, but there are also situations in which an agreement is renegotiated, Ziance said. An area that a governmental entity has more discretion on is its use of clawbacks, he added.
Greg LeRoy of Good Jobs First agrees with the estimate that around 40 percent of state-level incentive agreements are performance-based, citing his organization’s 2012 report on clawbacks and enforcement safeguards in economic subsidy programs.
“In our opinion, they are as safe as clawbacks, because they are back-loaded. The government doesn’t pay out the subsidy until the company delivers on the deal,” LeRoy told Tax Notes.
LeRoy also agreed with Ziance on the severity of today's environment, in which declarations of emergency have been issued, stores have been shuttered, and social distancing has become the norm. However, the distinction between unforeseen business circumstances and acts of God needs to be more black and white, he said.
“We don’t like the wiggle room where the Commerce Secretary has the authority to say ‘unforeseen business circumstance.’ That’s a loophole you can drive a truck through,” LeRoy said. “If you allow wiggle room short of force majeure, you create problems where politically favored or high-profile companies get treated differently. We think you need to be completely cold and even-handed about this.”