Disclaimer:
The law and legal rules are subject to continual
revision
and change. This article is dated March,
2004. No attempt has been made to update
this article
to reflect pertinent changes or developments
in the law, if any, since that date.
Industrial
revenue bonds (“IRB’s”)
are authorized to be issued by New Mexico
municipalities and the counties for the purpose
of providing project financing and also for
the purpose of allowing projects to qualify
for certain tax incentives, including (i)
an ad valorem or property tax exemption on
all real and personal property constituting
the project property and (ii) a gross receipts
tax deduction and compensating tax exemption
with regard to the acquisition of equipment
and other personal property for use in the
business to be conducted at the project.
Additionally, certain
types of IRBs (primarily for manufacturing
facilities) may be issued
as tax exempt “qualified small issue
bonds” under Section 144(a) of the
Internal Revenue Code (“Code”).
However, a qualified small issue bond may
not exceed $10,000,000, inclusive of all
capital expenditures made with respect to
the facility as provided in the Code and
the issuance of such bonds is subject to
an allocation under the statewide volume
cap by the New Mexico Board of Finance. Under
the current policy of the Board of Finance,
$13,795,000 is allocated for qualified small
issue bonds for 2004.
In today’s
low interest rate environment, many IRB
transactions are being closed on
a taxable basis. This means that instead
of the interest on the bonds being exempt
from federal income tax, the interest paid
on the bonds will be taxable. However, in
both cases, the interest on the bonds will
be exempt from New Mexico income taxes. Many
corporations and other entities are using
taxable IRBs so the project financing can
be undertaken without compliance with the
rigorous requirements for the issue of tax
exempt bonds and also because the yield curve
currently between tax exempt and taxable
obligations does not justify the additional
time and expense to meet Code requirements
for tax exempt obligations.
Additionally, in
the case of corporations and other entities
that are able to capitalize
their IRB projects from funds on hand or
raised separate from the issuance of IRBs,
such entities are currently proceeding with
what are called “self funded” IRB
transactions for the sole purpose of taking
advantage of the state tax incentives.
The benefits of the
property tax or ad valorem tax exemption
are fairly apparent. In short,
all real and personal property that qualifies
as project property will be exempt from ad
valorem or property taxes for as long as
the bonds are outstanding provided the project
property is subject to a lease with the governmental
issuer, not to exceed thirty (30) years.
The gross receipts tax deduction and the
corresponding compensating or use tax exemption
involves a tax structure that is unique to
New Mexico. The gross receipts tax is a tax
on the gross receipts of an entity that provides
goods or services and the tax collector is
the vendor of the goods and services. However,
in most cases the vendor passes the tax on
to the recipient of the goods and services
so that when goods are acquired in the state
of New Mexico, the seller of the goods will
add the gross receipts tax amount to the
purchase price of the goods and the vendor
will then remit the gross receipts tax to
the State in a report that is required to
be filed monthly. The current gross receipts
tax rate in Albuquerque is 5.8125%. The compensating
or use tax (at a slightly lower rate than
the gross receipts tax) is a tax on the transactions
that would be subject to the gross receipts
tax if the transaction or sale occurred in
the State of New Mexico. This would apply
when a company acquires equipment for a facility
from an out of state vendor and the equipment
is then delivered to the purchaser and used
by the purchaser in the State. Under the
law, the purchaser is obligated to pay the
tax directly to the State and to submit a
report with regard to the transaction. The
gross receipts tax and compensating or use
tax exemption is usually considered to be
the benefit of greatest value in the initial
development of an IRB facility within the
State.
An IRB transaction
is commenced by the user of a proposed
facility making application
to a municipality or a county, providing
certain information necessary for the governmental
entity to make a preliminary assessment of
the project, including in some instances,
the preparation of a cost benefit and feasibility
analysis to determine the overall benefit
of the project in terms of jobs and tax revenues
generated versus the tax benefits or subsidies
provided, that are treated as costs or charges
to the governmental entity. Assuming the
basic economics of the project are satisfactory
to the local municipality or county, such
entity often will adopt an inducement or
reimbursement resolution providing a non
binding statement of the governmental entity’s
intent to proceed with the project and issuance
of bonds. Assuming the necessary financing
is obtained by the project user and the transaction
documents are prepared, at closing, all real
and/or personal property comprising the IRB
project will be deeded or otherwise conveyed
to the IRB issuer, which the issuer then
simultaneously leases back to the IRB user
(or company) for the term of the bonds, with
the company being obligated to purchase the
project for a nominal sum when the bond matures
or at the time of early redemption of the
bonds. It is the responsibility of the IRB
user to obtain financing for the project
based on its own credit (or credit enhancement
it provides), and the governmental entity,
by law, cannot provide any credit support
to advance the project except as authorized
under the Local Economic Development Act
(which should be addressed separately). The
lease arrangement under which the project
property is owned by the governmental entity
allows the project property to be treated
as property owned by the governmental entity,
which under New Mexico law and the constitution
allows the property to be exempt from ad
valorem or property taxation and also permits
the purchase of depreciable tangible personal
property that is part of the IRB project
and purchased with bond proceeds to be deductible
from gross receipts tax and exempt from the
compensating or use tax.
It was mentioned
above that certain corporations and other
entities may choose to use IRBs
only to qualify for the tax incentives available
under New Mexico law. In that situation,
an IRB can be issued as part of a self funded
transaction, meaning that the financial wherewithal
to “fund” the IRB would actually
come from the project user (“parent”)
or a related entity. In this scenario, the
IRB would be “purchased” by an
affiliate of the parent that will build and
operate the IRB project, and the funds necessary
to acquire the IRB can actually be transferred
from the parent entity to the affiliate and
then back to the parent via the trustee,
provided proper recordkeeping is maintained
as to the flow of monies that constitute
bond proceeds. Generally, a financial institution
with trust powers will act as a trustee or
depository and provide recordkeeping of the
funds that are received from the affiliate
and then applied through a requisition or
draw by the parent in providing financing
for the project. The monies that are made
available to the affiliate (in order to fund
the bond) can come directly from the parent
or from a third party lender that provides
funds based upon the financial wherewithal
of the affiliate or a guarantee of the parent.
This scenario would give the project owner
the greatest degree of control over the timing
of all aspects of the IRB transaction, and
would permit the necessary bond documents
to be drawn on terms and conditions that
would be favorable to the parent subject,
of course, to the requirements imposed by
the municipality or county issuer of the
IRBs.
Generally, a wide
variety of business activities would constitute
qualified “projects” under
the IRB legislation, including (i) manufacturing,
processing or assembling of any agricultural
or manufactured project; (ii) any commercial
enterprise in storing, warehousing, distributing
or selling products of agriculture, mining
or industry, but not including facilities
for the sale of goods or commodities that
retail; (iii) any business involving the
supplying of services to the general public,
but excluding the sale of goods or commodities
that retail; (iv) any electric generation
facility other than one for which both a
location approval and certificate of convenience
and necessity are required prior to commencing
construction or operation under the New Mexico
Public Utility Act and the Electric Utility
Industry Restructuring Act of 1999; and (v)
any 501(c)(3) corporation.
The foregoing discussion
provides only general information regarding
IRBs in New Mexico and, as an overview, necessarily
simplifies the legal issues that are involved
in using IRBs for a particular project. Additionally,
the law and rules involving the issuance
of IRBs in New Mexico are subject to change
from time to time and any business entity
interested in using IRBs is advised to engage
its own legal counsel to provide advice concerning
the facts and circumstances of a particular
project.
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