On August 7, Illinois Governor Pat Quinn signed legislation that extends the state's Enterprise Zone program and allows for new areas to be designated as "Enterprise Zones."1 Specifically, the legislation: (i) extends the sunset of the Illinois Enterprise Zone program; (ii) creates an Enterprise Zone Board; and (iii) increases the reporting requirements of companies that receive tax benefits from the Enterprise Zone and High Impact Business programs.2 In addition, the legislation amends or eliminates some of the tax provisions relating to Enterprise Zones.
The Illinois Enterprise Zone program, originally enacted in 1982, is one of the state's most well-known economic development tools.3 The program provides for the establishment of "depressed" geographic areas, known as "Enterprise Zones," which are administered by counties and municipalities. Businesses located in areas that have been designated as Enterprise Zones by the Illinois Department of Commerce and Economic Opportunity (DCEO) are eligible for a number of tax incentives, including but not limited to, an investment tax credit and jobs tax credit for income tax purposes, a limited machinery and equipment sales tax exemption and a utility tax exemption. The maximum life of an Enterprise Zone is 30 years4 and as such, a number of existing zones were scheduled to expire shortly.
Enterprise Zone Act
Definitions of Terms
The legislation provides new definitions of terms relevant to the Enterprise Zone designation.5 In particular, it defines "Board," "local labor market area," "full-time equivalent job," and "full-time retained job."
Expiring Enterprise Zones
The legislation extends the life of existing Enterprise Zones, which had been scheduled to expire by operation of law prior to July 1, 2016.6 All such Enterprise Zones are extended until July 1, 2016.
Existing Enterprise Zones must reapply for designation in order to keep enterprise zone status after the scheduled date of expiration.7
New Proposed Enterprise Zones
Representatives of new proposed zones also have to apply for zone designation to replace expiring zones.8 The new proposed zones need not be located in the same geographic area as the expiring zones.
Enterprise Zone Application Process
The legislation requires the DCEO to develop an enterprise zone application process for both expiring and newly proposed zones by March 31, 2013.9
Pursuant to the provisions of the legislation, the applications received by the DCEO, along with the DCEO's recommendations, are required to be submitted to a newly created Enterprise Zone Board.10 The applications will be reviewed and approved by this five person board, comprised of the DCEO Director, the Director of Revenue, and three members appointed by the governor.11 The newly designated zones are effective for 15 years, will be reviewed after 13 years and will have the possibility of being extended for an additional 10 years for a total of 25 years.12
Qualifications for Enterprise Zones
The legislation sets forth new detailed eligibility criteria for Enterprise Zone designation.13 Applicants are required to meet three or more of the following 10 criteria:
1. All or part of the local labor market area14 has had an annual average unemployment rate of at least 120 percent of the state's annual average for the most recent calendar year or fiscal year as reported by the Department of Employment Security;
2. Designation will result in the creation or retention of a minimum aggregate of 1,000 full-time equivalent jobs due to an investment of $100,000,000 or more;
3. All or part of the local labor market area has a poverty rate of at least 20 percent, or 50 percent or more of the children participate in the federal free lunch program, or 20 percent or more of the households receive food stamps;
4. An abandoned coal mine or brownfield is in the proposed zone, or all or a portion of the zone was declared a federal disaster area in the three years preceding the application;
5. The local labor market area contains large employers that have downsized over the years, or there have been plant closures, or state or federal facility closures in the five years prior to the date of application, affecting more than 50 workers;
6. The local labor market area contains a high floor vacancy rate of industrial or commercial properties, or vacant or demolished commercial and industrial structures are prevalent, or industrial structures in the local labor market area are not used because of age, deterioration, relocation of former occupants or cessation of operation;
7. The applicant demonstrates a substantial plan for using the designation to improve the state and local government tax base;
8. Significant public infrastructure is present in the local labor market area in addition to a plan for infrastructure development and improvement;
9. High schools and community colleges located within the local labor market area are engaged in certain specified training that prepares students for careers; and
10. The change in equalized assessed valuation of industrial and/or commercial properties in the five years prior to the date of application is equal to or less than 50 percent of the state average change in law for the same period of time.15
Businesses that receive Enterprise Zone tax incentives are required to compile detailed reports of the benefits received to the Illinois Department of Revenue no later than March 30 of every year.16 Employers are required to report job creation, retention and capital investment numbers within the zone annually to the zone administrator and the zone administrator will compile the information into a report to the Department of Revenue. The Department of Revenue will then take the reports it receives and compile them into a report for the DCEO.
Enterprise Zone Building Materials Exemption
The legislation modifies the Retailers' Occupation Tax Act's Enterprise Zone building materials exemption.17 This exemption applies to building materials to be used for real estate within an Enterprise Zone. On or after July 1, 2013, retailers are required to document the exemption by obtaining a certification from the purchaser. The certification must contain the Enterprise Zone building materials exemption certification number issued to the purchaser by the Department of Revenue. Prior to July 1, 2013, certificates are issued to the purchaser by the zone administrator.
Moreover, the legislation requires the issuance of High Impact Business Building Exemption Certificate numbers by the Department of Revenue.18
Income Tax Credits and Deductions Eliminated
The legislation also amends the Illinois Income Tax Act by eliminating the Enterprise Zone job tax credit,19 the Enterprise Zone dividend deduction20 and the Enterprise Zone interest income deduction for financial institutions.21
In light of the state's budget crisis, it is in the state's interest to keep policies in effect that drive business development and growth. The Enterprise Zone program stimulates growth at the local level in "depressed" areas of the state. As explained by the governor, the legislation "provides employers with the long-term certainty they need to grow, and strengthens oversight standards to ensure accountability from businesses that participate in the program."22
Zone administrators should be aware of the requirements to extend their zone's designation as an Enterprise Zone and other depressed areas that have not been designated as an Enterprise Zone should seize the opportunity to apply for designation. Moreover, businesses taking advantage of the Enterprise Zone incentives should be aware of the changes with respect to the income tax credits and deductions, and certain sales and use tax exemptions.
1 P.A. 97-0905 (S.B. 3616), Laws 2012.
2 Press Release, Illinois Governor's Office, Aug. 7, 2012.
3 The Illinois Enterprise Zone Act is codified at 20 ILL. COMP. STAT. 655/1 to 655/12-10.
4 20 ILL. COMP. STAT. 655/5.3(c).
5 20 ILL. COMP. STAT. 655/3.
6 20 ILL. COMP. STAT. 655/5.3.
8 Id. The Illinois Enterprise Zone Act only allows for a fixed number of Enterprise Zones at any given time.
9 20 ILL. COMP. STAT. 655/5.2.
10 20 ILL. COMP. STAT. 655/4.1; 20 ILL. COMP. STAT. 655/5.2(c); 20 ILL. COMP. STAT. 655/5.2.1.
11 20 ILL. COMP. STAT. 655/5.2.1.
12 20 ILL. COMP. STAT. 655/5.3(c).
13 20 ILL. COMP. STAT. 655/4.
14 20 ILL. COMP. STAT. 655/3 is amended to add a definition of "local labor market area" as "an economically integrated area within which individuals can reside and find employment within a reasonable distance or can readily change jobs without changing their place of residence."
15 20 ILL. COMP. STAT. 655/4.
16 20 ILL. COMP. STAT. 655/8.1.
17 35 ILL. COMP. STAT. 120/5k.
18 35 ILL. COMP. STAT. 120/5l.
19 35 ILL. COMP. STAT. 5/201(g).
20 35 ILL. COMP. STAT. 5/203(a)(2)(J), (b)(2)(K), (c)(2)(M), (d)(2)(K).
21 35 ILL. COMP. STAT. 5/203(b)(2)(M).
22 Press Release, Illinois Governor's Office, Aug. 7, 2012.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.