April 28, 2002 – The U.S. Virgin Islands has enacted two incentive programs, one to encourage investment in areas deemed to be "in need of economic and physical revitalization" on the islands of St. Croix and St. Thomas, and the other to encourage rehabilitation of historic structures on St. Croix. These programs have not yet been fully implemented but it is anticipated that they will be in the next few months.
Section 8 of Act No. 6503 [1] transfers administration of the Enterprise Zone Program [2] from the Historic Preservation Commission to the Economic Development Authority. The EDA was created last year to serve as the USVI umbrella agency for all economic development programs. The legislation was approved by Gov. Charles W. Turnbull on Feb. 21, 2002.
The Enterprise Zone Program provides incentives for businesses to invest in "severely distressed" Enterprise Zone areas and to provide jobs for the residents of such areas by providing tax benefits and regulatory relief. Each Enterprise Zone has been named by the governor in a proclamation or executive order that includes a detailed legal description of the area included. [3]
The Enterprise Zones named to date are the towns of Christiansted [4] and Frederiksted [5] on St. Croix and the Savan/Market Square [6], Downstreet [7], Upstreet [8] and Garden Street [9] areas of the town of Charlotte Amalie on St. Thomas. The latter four areas were adopted by the Enterprise Zone Commission on November 16, 2000, as areas of Charlotte Amalie where commercial activity is in a depressed state.
The Revenue Enhancement Act of 1998 [10] provides that the Tax Assessor shall grant owners of real property located within the historical districts of Christiansted and Frederiksted a property tax credit equal to 50 percent of the tax assessment for the past two assessment years if the owner develops or improves the real property and if the value of the development or improvement is more than $50,000.
The Enterprise Zone Commission
The Enterprise Zone Program is administered by the Enterprise Zone Commission (EZC), which as initially enacted was chaired by the Planning and Natural Resources commissioner and included as one member a resident of an Enterprise Zone. [11] However, in late January, Sen. Carlton Dowe introduced an amendment that makes the commission a "subsidiary entity wholly administered and operated by the Economic Development Authority." The Legislature passed the amendment on Jan. 31, 2002, as a section of Bill No. 24-0208 and sent it to Governor Turnbull for his signature on Feb. 11, 2002.
Dowe's chief of staff, Luis Sylvester, said the senator sponsored the amendment because "the Enterprise Zone Program was located under the Historic Preservation Commission, but with the creation of the Economic Development Authority last year as the territory's economic umbrella agency, it was a much better fit to have the Enterprise Zone Program under the Economic Development Authority."
As a result of the amendment, EDA staff will serve as staff of the EZC for compliance, administration and marketing purposes, except to the extent the EZC provides otherwise in rules and regulations. Each EZC member holds office until a successor is appointed and qualified. The EDA board members are Dean Plaskett, Planning and Natural Resources Department commissioner, chair; Kent Bernier, economic adviser to the governor, vice chair; Louis Willis, Internal Revenue Bureau director; Willis Todmann, Government Employees Retirement System CFO and treasurer; Mary Ann Pickard and Randolph Allen.
Under the amendment, the EZC "shall be organized as a committee of the Economic Development Authority and shall be composed of five members of the Economic Development Authority Board of Directors established under this title as appointed by the Chairman of the Economic Development Authority." Plaskett has not yet named the five commission members.
Frank Schulterbrandt, EDA chief executive officer, has said that the Enterprise Zone Program "will enhance as well as encourage the economic empowerment of deprived communities in the territory that qualify under the program and, furthermore, will facilitate their revitalization."
The EZC's extensive powers and duties include developing and overseeing application and compliance procedures for beneficiaries, reviewing all applications and granting the necessary certificates for benefits, promoting and publicizing the Enterprise Zone Program, providing technical and business assistance related to tax incentives and the development of alternative revenue sources to businesses and residents within each Enterprise Zone, and coordinating federal and territorial business assistance programs for businesses located in Enterprise Zones. Enterprise Zone certificates are granted by the commission and do not require approval of the governor. [12]
The EZC is required to file a detailed report of its activities for each fiscal year with the governor and the Legislature.
Enterprise Zone Program requirements
In order to qualify for benefits under the Enterprise Zone Program, an applicant must meet these requirements: [13]
– Establish or continue to maintain a business with a valid business license within an Enterprise Zone.
– Invest at least $10,000, or an additional $10,000, in a business that will advance the economic well being of the Enterprise Zone. [14] The assessed value of land and previously existing buildings used in the business are included only to the extent that the value does not exceed 20 percent of the investment undertaken. [15] The minimum investment may be reduced if the EZC finds that the proposed business will provide sufficient employment to justify the lower investment.
– Be a resident of the USVI (if a natural person). A resident is any U.S. citizen or any holder of an alien registration receipt card who currently has been domiciled in the USVI for at least one year. A person can demonstrate such residency via the date of issuance of a W-2 form, a voter registration card, a permanent resident card, a USVI driver's license, or other means as provided by the EZC.
– Be the actual investor in the Enterprise Zone, and not a contractor, subcontractor or agent of the investor.
– Meet all federal and territorial standards of ecological compatibility [16] and comply with all federal and territorial laws, including anti-discrimination and wrongful discharge laws. [17]
– Employ at least two USVI residents in the business directly or through subcontractors; or, for existing businesses, add at least two new employees who are USVI residents. The EZC can waive this requirement upon a demonstration to the commission that employment of this number of persons in this particular enterprise would not be economically feasible or practicable, and upon a further finding by the commission that the desirability of the proposed enterprise outweighs the fact that it will not provide employment for at least two residents, or for two additional residents, as appropriate. [18]
– Agree, if proposing to do business on land adjoining any beach or shoreline, to grant to the USVI government a perpetual easement across such land to the beach or shoreline to provide free and unrestricted access to the public. The easement must be recorded by the Recorder of Deeds upon the designation of the business as an Enterprise Zone business by the commission.
– Agree in writing to notify the USVI Employment Service as to the availability of employment by the business or its subcontractors, the number of employees required, the occupational classification of such workers and the applicable wage rate. [19]
– File copies of gross receipts tax, property ta
x and income tax returns with the commission. The information will be kept confidential. [20]
– Be in compliance with applicable federal and territorial statutes and Enterprise Zone Program rules and regulations if the applicant is a USVI or foreign corporation, partnership, limited liability company or other entity. [21]
Businesses receiving benefits under the program must agree in writing to employ, and to require all contractors that they retain to employ, USVI residents. [22] Also, they must contract for services and the purchase of goods, materials and supplies from USVI residents and entities incorporated or registered under USVI law and licensed to do business in the USVI for at least one year previously.
However, if the bid of such a resident or entity exceeds the bid of an nonresident person or entity by more than 15 percent, the business can make the purchase from the nonresident person or entity. Each Enterprise Zone business and all contractors and subcontractors of such business must invite competitive bidding for all services, goods and materials [23] and must apprise each bidder in writing of the name of the successful bidder and the bid amount within 30 days after awarding the bid.
Benefits granted to Enterprise Zone businesses
Each Enterprise Zone business qualifies for these tax credits and tax benefits:
– A nonrefundable gross receipts tax credit or an income tax credit equal to 25 percent of the actual value expended within a fiscal year for construction of a new building within the Enterprise Zone
– A nonrefundable gross receipts tax credit or an income tax credit equal to 25 percent of the actual value expended within a fiscal year for rehabilitation of buildings or other real property within the Enterprise Zone.
– A nonrefundable gross receipts tax credit or an income tax credit equal to 10 percent of the expenditures within a fiscal year for investment in machinery and equipment for exclusive use by the Enterprise Zone Business
– A gross receipts tax rate of 3 percent for gross receipts derived by the Enterprise Zone business.
– A one-time, nonrefundable $500 income tax credit for every job created within the Enterprise Zone for which a USVI resident is hired, which credit must be taken for the fiscal year in which the resident is hired.
– A property tax credit equal to the increase in property taxes assessed due to the renovation, rehabilitation or construction of property within the Enterprise Zone.
As appropriate, an Enterprise Zone business must indicate for the fiscal year in which an expenditure is made whether it is taking the gross receipts or the income tax credit for such expenditure. The credit must be taken on the appropriate tax return for the fiscal year during which the actual value was expended, or carried back on an amended return for up to two years before the actual value was expended, or carried forward for a period of up to eight years after the actual value was expended.
An Enterprise Zone business qualifying for more than one of the credits can elect to take one or more credits against income tax — for example, the credit for new construction and machinery — and another credit against gross receipts tax. However, an expenditure can never be used in calculating more than one credit.
Any credit derived by an entity not taxable at the entity level — such as a limited liability company, a partnership or a Subchapter S corporation — flows through to its owners as long as they are USVI residents. [24]
Each Enterprise Zone business can elect the commencement date of such five-year period and can elect a commencement date for expenditures of up to two years prior to the date that it has been granted benefits. And in such a case, the Enterprise Zone business can take the credits for expenditures made in that year or those years by filing amended returns with the USVI Internal Revenue Bureau and the USVI Finance Department as appropriate.
The benefits can be taken over a period of 10 years, commencing two years before the benefits are granted and extended up to eight years after the benefits are granted. But each benefit must be utilized to the extent possible in a year before any balance is carried forward to the subsequent year with regard to credits and other benefits carried forward. [25] The property tax benefit and the reduced gross receipts tax rate will apply for the five-year benefit period. [26]
Any duly licensed financial institution doing business in the USVI is entitled to a reduction in the income taxes it incurs to the USVI that are attributable to interest received on loans granted to Enterprise Zone businesses at below-market rates. The reduction is capped at five years per loan and is calculated separately for each loan. The reduction shall be 90 percent for the first year, 70 percent for the second, 50 percent for the third, 30 percent for the fourth and 10 percent for the fifth. [27]
The proceeds of such loans must be utilized exclusively by the Enterprise Zone business within one or more Enterprise Zones, and the business must so represent in writing to the bank or other financial institution as a condition for receipt of the loan. [28] If the loan is extended for more than five years, the Enterprise Zone Program benefits will apply only to interest received in those years that the borrower is an Enterprise Zone business.
Coordination between Enterprise Zone and Economic Development programs
Economic Development Program [29] beneficiaries are not eligible to be designated as Enterprise Zone businesses. However, a former Economic Development Program beneficiary can apply for benefits as an Enterprise Zone business, and a current Economic Development Program beneficiary can apply for benefits as an Enterprise Zone business and terminate its benefits under the Economic Development Program as of the effective date of its benefits as an Enterprise Zone business. [30]
Similarly, an Enterprise Zone business can apply for benefits under the Economic Development Program and upon the receipt of such benefits, elect to terminate benefits under the Enterprise Zone Program as of the effective date of its benefits under the Economic Development Program.
Requirements for benefits under the Revenue Enhancement Act
To obtain the property tax credit under the Revenue Enhancement Act, the Historic Preservation Commission must certify that the development or improvement is consistent with the U.S. Secretary of the Interior’s standards for rehabilitation of historic structures. The standards were originally published in 1977 and revised in 1990 as part of the Department of the Interior regulations. [31] They pertain to historic buildings of all materials, construction types, sizes and occupancy and encompass the exterior and interior of the structures.
The standards also encompass related landscape features and the building site and environment as well as attached, adjacent or related new construction. The standards are to be applied to specific rehabilitation projects in a reasonable manner, taking into consideration economic and technical feasibility. They are:
– A property shall be used for its historic purpose or be placed in a new use that requires minimal change to the defining characteristics of the building and its site and environment.
– The historic character of the property shall be retained and preserved. The removal of historic materials or the alteration of features and spaces that characterize a property shall be avoided.
– Each property shall be recognized as a physical record of its time, place and use. Changes that create a false sense of historical development, such as adding conjectural features or architectural elements from other buildings, shall not be undertaken.
– Most properties change over time; those changes that have acquired historic significance in their own right shall be retaine
d and preserved.
– Distinctive features, finishes and construction techniques or examples of craftsmanship that characterize a property shall be preserved.
– Deteriorated historic features shall be repaired rather than replaced. Where the severity of deterioration requires replacement of a distinctive feature, the new feature shall match the old in design, color, texture and other visual qualities and, where possible, in materials. Replacement of missing features shall be substantiated by documentary, physical or pictorial evidence.
– Chemical or physical treatments, such as sandblasting, that cause damage to historic materials shall not be used. The surface cleaning of structures, if appropriate, shall be undertaken using the gentlest means possible.
– Significant archeological resources affected by a project shall be protected and preserved. If such resources must be disturbed, mitigation measures shall be undertaken.
– New additions, exterior alterations or related new construction shall not destroy historic materials that characterize the property. The new work shall be differentiated from the old and shall be compatible with the massing, size, scale and architectural features to protect the historic integrity of the property and its environment.
– New additions and adjacent or related new construction shall be undertaken in such a manner that if removed in the future, the essential form and integrity of the historic property and its environment would be unimpaired.
To date, one property owner has qualified for the Revenue Enhancement Program property tax credit: Robert L. Merwin & Co. Inc. in Frederiksted. Its president, Robert Merwin, has called himself the program’s "guinea pig." [32]
Footnotes (numbers bracketed in text):
1. Enacted by the USVI Legislature as Bill No. 24-0208.
2. Act No. 6294, Section 2, Sept. 14, 1999, Sess. L. 1999.
3. Section 1003(1), Chapter 19, Title 29, VIC.
4. The Enterprise Zone Program’s boundaries in Christiansted extend roughly from Gallows Bay in the east to Richmond in the west and include Times Square. Specifically, the northern boundary is Alexander Hamilton House through the Christiansted National Historic Site continuing through Gallows Bay Marina. The southern boundary is Peters Farm and Gamble Hospitals Grunde. The eastern boundary is East End Road and Mount Welcome Road. The western boundary begins at the intersection of Road No. 70 and Friedensthal and passes the Old Senate Building, including Richmond and Soboetker Lane. The United States purchased the USVI from Denmark in 1917, and many of the streets retain their original Danish names. The towns of Christiansted and Frederiksted were designated as enterprise zones on April 22, 1997, in Executive Order No. 370-1997 signed by then-Gov. Roy L. Schneider.
5. The Frederiksted boundaries are as follows: The northern boundary is La Grange Road, Paul E. Joseph Stadium parking area. The southern boundary starts from the west on Fisher Street to the end of Fishers Street to the east. The eastern boundary is at East Street, Cemetery and Holy Trinity Lutheran Church. The western boundary is Grand Beach, Strand Street, Waterfront and Fort Frederiksted Museum.
6. As designated by Sean L. Krigger, then architectural historian, Virgin Islands State Historic Preservation Office: Starting at the southeast corner of Vimmelskafts Gade 13, then west along the south side of Vimmelskafts continuing along Torves Strade and Prindsesse Gade to the southwest corner of Prindsesse Gade 4, then north along the east lot lines of Prindsesse Gade 4, Regjerrings Gade 6 and 19, Gamle Gade 22 and 9, and General Gade 1B, 2AAB, and 3B, continuing west along Brodrenes Gade to Pile Strade and then north along the west side of Pile Strade to the southeast corner of Pile Strade 9, then west along the south lot line of Pile Strade 9 and Jode Gade 5 to Jode Gade. The boundary continues north along the east side of Jode Gade to Levkoj Strade, then east along Levkoj Strade to the Savan Gut and south along the west side of the Savan Gut to the northwest corner of Vester Gade 36 and east along the north lot lines of Vester Gade 36, 18A and 18B, then south along the east lot line of Vester Gade 18B, then south along the east lot line of Lille Gade 1. The boundary continues west along Lille Gade to the east lot line of Vester Gade 16B, then south along the east lot line of Vester Gade 16B, then west along the south lot line of Vester Gade 16B to Vester Gade. The boundary then goes south along the west side of Vester Gade to Store Strade, and southeast along Savan Gut to the north lot line of Vimmelskafts Gade 13. Finally the boundary continues east along the north lot line of Vimmelskafts Gade 13 and south along the east lot line of Vimmelskafts Gade 13 to the point of origin. The area of Savan, but not Market Square, was first designated as an Enterprise Zone by Executive Order No. 373-1997, signed on July 17, 1997, by then Gov. Roy L. Schneider.
7. As designated by Sean L. Krigger, then architectural historian, Virgin Islands State Historic Preservation Office: Starting at the northeast corner of Kronprindsens Gade 73 then south long the eastern lot line of Krondprindsens Gade 73, then west along the southern lot lines of Kronprindsens Gade to Ny Tver Gade. The boundary next goes north along the east side of Ny Tver Gade to Kronprindsens Tver Gade, then west along the north side of Kronprindsens Tver Gade and south along the eastern lot lines of Kronprindsens Gade 56AB and 56 ABA, then west along the southern lot lines of Kronprindsens Gade to the south west corner of Kronprindsens Gade 52. The boundary goes north along the west lot line of Kronprindsens Gade 52 to Kronprindsens Gade, then west along Kronprindsens Gade to the southwest corner of Anna's Fancy 29, then north along the west lot line of Anna's Fancy 29, then east along the north lot lines of Anna's Fancy 29, 28, 25, 24, 21,20, 15A, 14, 8, 7, 6, and 1. The boundary continues east along the north of lot lines of Kronprindsens Gade 45, 44A, 44, 43, 42, 41, 40, 39, 38, 37, 36, 35A, 34, 32A, 32B, 31C, 31A, 30, 29A, 28, 27, 26, 25, 24, 23, and 22A. Finally, the boundary continue south along the east lot line of Kronprindsens Gade 22A and east along the south side of Kronprindsens Gade to the point of start.
8. As designated by Sean L. Krigger, then Architectural Historian, Virgin Islands State Historic Preservation Office: Starting at the southeast corner of Norre Gade 24C, the boundary moves west along the south lot line of Norre Gade 24C, then north along the west lot line of Norre Gade 24C to Bjerge Gade 2, west along the south lot line of Bjerge Gade 2 to Bjerge Gade, then north along the west side of Bjerge Gade to Norre Gade. At Norre Gade the boundary continues west along Norre Gade to Kanal Gade, then turns north up Kanal Gade to Kongens Gade. The boundary continues west on Kongens Gade to the west lot line of Kongens Gade 17, then moves north along the west lot line of Kongens Gade 17 to the south lot line of Dronningens Gade 18b, then moves west along the south lot lines of Dronningens Gade 18b and 19. The boundary continues north along the west lot line of Dronningens Gade 19 to Dronningens Gade, then west along Dronningens Gade to Lille Taarne Gade, then north along Lille Taarne Gade to Hospital line 28, then east along Hospital Line to Hospital Ground 9. The boundary then runs nother along the west lot lines of Hospital Ground 9, 106, 112, 111, and 110, continues east along the north lot lines of Hospital Ground 110 and 109, continues east along the north lot lines of Hospital Ground 110 and 109, then south along the east lot lines of Hospital Ground 109 and 108 to Hospital Line. The boundary then continues east on Hospital Line to the northeast corner of Madamberg 4B, then south along the east lot line of Madamberg 4B to Taarnberg Ross, then west along Taarnberg Ross to Taarnberg Ross 3. The boundary continues south along the east lot line of Taarnberg Ross 3, then west along the south lot line of Taarnberg 3
to the east lot line of Kongens Gade 1a. The boundary runs south along the east lot line of Kongens 1a, then west along the south lot line of Kongens Gade 1a to Frederiksberg Gade, then south along Frederiksberg Gade to the point of origin.
9. As designated by Sean L. Krigger, then architectural historian, Virgin Islands State Historic Preservation Office: Starting at the southeast corner of Kommandant Gade 5B, then west along the south lot lines of Kommandant Gade 5B & 5A, Kommandant Gade over Vandet 4 & 4AB, Krystal Gade 23, 22, 21, 20, 19, & 18, then north along the west lot lines of Nye Gade 3A, 4, 5, & 7A and Store Gronne Gade 5 to Cocus Strade. The boundary runs from Cocus Strade east along the north lot lines of Store Gronne Gade 5, 6B & 7, 8 to the gut, then south along the gut to Kommandant Gade over Vandet. The boundary continues north along Kommandant Gade over Vandet to Kommandant Tver Gade, then east along Kommandant Tver Gade to Kommandant Gade, then north along Kommandant Gade to Kommandant Gade 13BA, and then east along the north lot line of Kommandant Gade 13BA. The boundary continues south along the east lot lines of Kommandant Gade 13BA, 13B, 35BBBA, 11B, 10A, 9A, 8, 7BB, 7B, 6, and 5B to the point of origin.
10. Section 10 of Act No. 6269, effective Oct. 31, 1998.
11. Section 1004, Chapter 19, Title 29, VIC.
12. Section 1007, Chapter 19, Title 29, VIC. The commission also is directed to work with federal and territorial departments and agencies to coordinate the Enterprise Zone Program with other programs carried out in the territory, including housing and economic development programs, programs providing financial and other assistance to small businesses, programs providing transportation assistance, and job training programs. The commission is also directed to prepare and promulgate such rules and regulations as are necessary to complement this chapter and to perform such other acts and functions as may be required by the governor.
13. Section 1011(1), Chapter 19, Title 29, VIC.
14. The fair market value of all equipment leased for a term of at least five years shall be included in determining compliance with the investment requirement. Section 1011(1)(b), Chapter 19, Title 29, VIC.
15. This limitation does not apply to any business of a nature in which investment in land and alteration and/or improvement thereof represents its primary investment factor.
16. Section 1011(e), Chapter 19, Title 29, VIC.
17. Section 1011(g), Chapter 19, Title 29, VIC.
18. Section 1011(f), Chapter 19, Title 29, VIC.
19. Section 1011(i), Chapter 19, Title 29, VIC.
20. Section 1011(j), Chapter 19, Title 29, VIC. The gross receipts and property tax returns shall be confidential information as defined in Section 822, Chapter 21, Title 33, VIC, and shall only be released in accordance with that section. The income tax returns shall be confidential information as defined in Section 6103 of the Internal Revenue Code of 1986, as amended, as applicable to the USVI, and shall only be released in accordance with that section.
21. Section 1011(2), Chapter 19, Title 29, VIC.
22. Section 1012 (1), Chapter 19, Title 29, VIC.
23. Section 236, Chapter 23, Title 31, VIC.
24. Section 1014((3), Chapter 19, Title 29, VIC.
25. Section 1014(4), Chapter 19, Title 29, VIC. An Enterprise Zone business shall make an election at the same time that it elects the commencement date of its benefits indicating whether it will utilize its benefits on a carry-back basis, and such election cannot be changed at a later date.
26. Section 1014(5), Chapter 19, Title 29, VIC.
27. Section 1014(8), Chapter 19, Title 29, VIC.
28. Section 1014(7), Chapter 19, Title 29, VIC.
29. Chapter 12, Title 29, VIC.
30. Section 1013(2), Chapter 19, Title 29, VIC.
31. 36 CFR Part 67, Historic Preservation Certifications.
32. Quote in The Virgin Islands Daily News, "No tax breaks equal no improvements," Page 7, July 12, 2001.
Editor's note: Marjorie Rawls Roberts is an attorney in private practice on St. Thomas. She previously served as an attorney adviser in the U.S. Treasury Department's Office of Tax Policy and as chief counsel to the V.I. Internal Revenue Bureau. She can be contacted by e-mail at vitaxlaw@att.net or by fax at (340) 776-7951. An abbreviated version of this article appeared in the March 11, 2002, issue of Tax Notes International.
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