HSB Insider's Perspective:
Opportunities in the Land of the Rising Sun
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Dear Friends:
I was pleased to visit Japan alongside the South Carolina Department of Commerce on a delegation trip in November. Japan is one of the largest sources of FDI in South Carolina, second only to Germany. This statistic was well received by the companies interested in expanding their market share in the United States and potentially setting up operations in the Southeastern United States.
The economies of Japan and the Southeastern United States overlap heavily in automotive manufacturing. Demand for electric vehicles and battery technology (EV) is causing rapid changes to manufacturing processes and supply chain requirements, which are affecting companies from raw material suppliers to OEMs. Interestingly, some companies bemoaned the lack of cooperation between Western and Eastern manufacturers, noting the two hemispheres cannot seem to coordinate on plug-design for vehicles, let alone more complicated issues. More broadly, all of the automotive manufacturers have electric vehicles on their minds and appeared eager to change practices to adjust accordingly out of business necessity.
Perhaps the largest impediment to Japanese foreign direct investment is the currency imbalance. The strength of the US dollar might be a boon for American tourism overseas but increases the cost of investing in the United States significantly for a foreign company. In weeks prior to the trip, the yen hit its weakest value relative to the dollar in 30 years. The best hope for inbound FDI could be that the demand for EV is so powerful as to compel investment despite added costs resulting from currency imbalance.
Haynsworth Sinkler Boyd represents a number of existing Japanese clients and is eager to expand those relationships, along with new ones made on the trip.
Despite the significant challenges outlined above, the outlook for manufacturing foreign direct investment into the Southeast continues to be strong. Rumors suggest a record number of active “mega-projects” in the pipeline. The Southeast’s business-friendly climate, skilled workforce, world-class technical training programs, and relatively low costs of doing business, among a wide variety of other factors, attract investors from Asia and all over the world. The HSB Economic Development Team looks forward to working proactively with our clients and allies in an exciting year ahead.
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Pictured (l-r): Yoshi Fukushima, SC DOC; Ty Davenport, Richland Co. EDO; Philip Land, HSB; Tony Allen, SC DOC; David Royer, SC DOC.
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Insights from Korean Mission Trip
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In late October, I was pleased to join SC Commerce Secretary, Harry Lightsey, and representatives from SC Commerce, the Midlands and Charleston, for a week-long trade mission to South Korea. The visit primarily targeted the electric vehicle industry, with some additional meetings with healthcare and technology companies. On the whole, the meeting was highly informative and successful.
Recent political changes in South Korea, coupled with the location of Korean OEM’s in the Southeast, like Kia and Hyundai, have accelerated the Korean appetite to invest in the United States. South Korea is a global leader in electric vehicle and upstream battery-related technologies and the week’s time in South Korea was enlightening in terms of seeing the lifecycle of the electric battery industry, and at which points business and industry were generating value in the supply chain.
We visited a number of vehicle and battery component manufacturers who are at varying degrees of making FDI investment decisions in the United States. We also saw how recent start-up enterprises in the charging station and battery recycling space in particular had generated significant investor interest. Finally, we joined Sec. Lightsey at the Daegu Future Automotive Expo to meet with an international array of electric vehicle companies and discuss South Carolina as an investment opportunity.
I look forward to returning as I think it is likely that Korean interest in investing in the US will remain strong as the electric vehicle and battery space is growing rapidly in the country.
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South Carolina Department of Revenue Releases Ruling Addressing New Manufacturing Property Tax Exemption
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In June 2022, the South Carolina General Assembly enacted legislation providing for a 42.8571% valuation exemption applicable to manufacturing property in South Carolina. The practical impact of the valuation exemption is the same as a reduction in the assessment ratio on manufacturing property from 10.5% to 6%, subject to an important caveat outlined below. The state will reimburse political subdivisions for the revenue loss resulting from the new exemption, subject to an annual, statewide cap of $170,000,000. For any year in which the projected revenue reimbursement would exceed the cap, the valuation exemption will be reduced proportionately, thereby increasing the net tax due.
On December 1, 2022, the South Carolina Department of Revenue issued Revenue Ruling 22-13, addressing important questions surrounding the application of the new exemption. The key takeaways from the Revenue Ruling are as follows:
- The exemption applies to all property used in the conduct of a manufacturing business, not just property used directly in the manufacturing process.
- The exemption applies to all manufacturing property in South Carolina beginning with property tax year 2022, regardless of when the property was originally acquired.
- The exemption does not apply to property under a negotiated fee in lieu of tax (FILOT) arrangement but does apply to property that is subject to a non-negotiated payment in lieu of tax as a result of being included in a multi-county industrial park (MCIP).
- Manufacturing property that is eligible for the five-year abatement (applicable to manufacturers who invest at least $50,000 or more in any particular year, and resulting in a reduction in the millage rate applicable to such investments) will receive both the benefit of the five-year abatement and the new valuation exemption.
- Personal property used for research and development and used in the conduct of a manufacturing business is eligible for the new valuation exemption, but real property owned by or leased to a manufacturer and used primarily for research and development is assessed at 6% pursuant to SC Code 12-43-220(a)(2) and is therefore not eligible for the valuation exemption. The same rules apply to certain office and distribution facilities owned by or leased to manufacturers as well.
The formal conclusion by the South Carolina Department of Revenue that property in a multi-county industrial park (but not under a negotiated FILOT) is eligible for the new valuation exemption is critically important, as it significantly reduces any uncertainty that companies and counties might face in exploring creative incentive arrangements that maximize benefits for both companies and political subdivisions as a result of the change in law. Please contact a member of the HSB Economic Development Team with any questions about the new law and potential planning opportunities arising from the change.
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Tax Credit Reminders - Plan for 2023!
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Port Cargo Volume Credit
South Carolina Code § 12-6-3375 provides a tax credit to a taxpayer engaged in manufacturing, warehousing, or distribution that uses South Carolina port facilities and increases its port cargo volume at these facilities by at least 5% in a calendar year over its base year port cargo volume. Base year volume must be at least 75 net tons of non-containerized cargo, 385 cubic meters, or ten twenty-foot equivalent units. Form TC-30, "Port Cargo Volume Increase," is used to claim the credit.
It is important to note that tax credit applications should be submitted early in the year as the maximum amount that all taxpayers may claim pursuant to this section is subject to an annual cap. Tax credits may be taken against state income tax or as withholding tax refunds.
Agricultural Tax Credit
In 2018, South Carolina introduced a new program that provides a tax credit to agribusiness or agricultural packaging operations increasing their purchases of South Carolina agricultural products. If the "base year" of a company's purchases exceeded $100,000, and the company increased such purchases by at least 15%, the company can submit an application for credits against either state income or withholding taxes. The amount of the credits is determined by the South Carolina Coordinating Council, based on the information provided in the application. The credit may not exceed $100,000 per taxpayer in any one year. As with port cargo volume credits, these credits are also subject to an annual, statewide cap, so qualifying taxpayers should apply for credits as early in the year as possible.
Assessable Transfer of Interest Exemption
Taxpayers who purchased commercial (non-manufacturing) property in 2022 (or who own property which underwent an assessable transfer of interest (ATI) as defined in the South Carolina Real Property Valuation Reform Act) should consider taking advantage of statutory limitations on property tax increases for property taxed at a 6% assessment ratio. Taxpayers qualify for an “ATI exemption” equal to 25% of the fair market value of property that has undergone an ATI in 2022, provided that the ATI exemption may not reduce the taxable value of the property below the fair market value of the property prior to the ATI. In order to benefit from this limitation, the property owner must provide written notice to the applicable county assessor before January 30 of the year following the transfer. Taxpayers must proactively make the filing to capture the benefit of the ATI exemption. Failure to make the filing results in loss of this important benefit.
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2023 County Tiers Set for JTCs, Fee in Lieu and Tax Moratorium
Each year, South Carolina's 46 counties are designated as being within one of four "tiers" for job tax credit and job development credit purposes based on a county's unemployment rate and per capita income. On December 14, 2022, the SC Department of Revenue published the 2023 designations.
Below is a complete list of counties and their respective tiers for 2023. Interestingly, no counties changed tiers from 2022 to 2023. Further, there was no change in income tax moratorium counties (Chesterfield, Dillon, and Jasper), and no counties qualify for the reduced $1 million investment threshold for FILOT agreements.
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Per Capita Income Figures
On December 14, 2022, the South Carolina Department of Revenue released Information Letter 22-24, setting forth the updated per capita income level for the state at $52,467, up from $48,021 a year earlier. Please access the link to view the county per capita income levels. The state per capita income is relevant for the small business job tax credit, in which a taxpayer with 99 or fewer employees in an eligible industry increases employment by two or more new, full-time jobs. If the average wages of those jobs do not exceed 120% of the lower of the county or state average per capita income, the credits are cut in half. Notably, if the small business creates ten or more new, full-time jobs, the business qualifies for the full amount of job tax credits without regard to wages.
In addition, the state per capita income is relevant for purposes of defining a "qualifying service-related facility," which is applicable for both job tax credits and job development credits and which has become an increasingly important avenue for non-manufacturing businesses to qualify for key South Carolina incentives. Further, the figure is relevant to technology-intensive facilities for determining eligibility for the sales and use tax exemption for computer equipment, as well as for the state income tax credit on personal property expenditures associated with corporate headquarters projects.
Finally, job development credits are usually provided only for jobs paying at or above the county per capita income level at the time the initial application is approved (and adjusted every five years thereafter). As reflected in the Information Letter linked above, many counties experienced significant increases in per capita income from 2022 to 2023.
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From all of us at Haynsworth Sinkler Boyd, we hope you and your family have a safe and happy holiday season! We look forward to working with you in 2023.
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William R. Johnson, Economic Development Group Leader
1201 Main Street, 22nd Floor, Columbia, SC 29201
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Haynsworth Sinkler Boyd newsletters are intended to provide general information on the topics covered. The contents are not intended and should not be construed as legal advice or legal opinions. Readers should consult with legal counsel to obtain legal advice regarding particular situations. Any result the law firm and/or its attorneys may have achieved on behalf of clients in other matters does not necessarily indicate similar results can be obtained for other clients. © 2022 Haynsworth Sinkler Boyd, P.A.
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