Rulings of the Tax Commissioner

Re: Ruling Request: Motion Picture Production Tax Credit and Fringe Benefits

Dear *****:

This is in response to your e-mail to the Virginia Film Office in which you request guidance regarding whether certain fringe benefits provided by a production company are considered compensation and wages that are treated as qualifying expenses for purposes of the Motion Picture Production Tax Credit. Specifically, you provided a spreadsheet and requested guidance regarding whether each item in the spreadsheet would be considered a "qualified expense" when incurred for resident and non-resident employees. Additionally, you requested information regarding whether payroll handling fees are considered qualified expenses, and the specific rules that apply to such fees. The Virginia Film Office forwarded your inquiry to the Department of Taxation ("the Department") for a formal ruling.

The Motion Picture Production Tax Credit (Va. Code § 58.1-439.12:03) is actually comprised of three separate components: (1) a base credit, equal to 15 to 20 percent of qualified Virginia expenses, (2) an additional Virginia resident credit, equal to 10 to 20 percent of the total aggregate payroll for Virginia residents employed in connection with the production of certain films in Virginia, and (3) an additional Virginia resident first-time industry employee credit, equal to 10 percent of the total aggregate payroll for Virginia residents employed for the first time as actors or members of a production crew in connection with the production of a film in Virginia. Expenses that qualify for the Virginia resident credit also qualify for the Virginia resident first-time industry employee credit to the extent that such expenses are for Virginia residents who are employed as first-time actors or first-time members of a production crew in connection with a Virginia production. See Va. Code § 58.1-439.12:03. For purposes of the two additional Virginia credits, only wages subject to federal withholding (i.e., "wages" as defined in IRC § 3401) are considered qualifying expenses. Expenses that do not meet the requirements of the two additional Virginia resident credits may still qualify for the base credit to the extent that such expenses are related to the production of a film and are considered amounts spent in Virginia. For more information regarding the specific requirements of the tax credit, see the Motion Picture Production Tax Credit Guidelines (Public Document ("P.D.") 12-128 (8/6/2012)).

The spreadsheet provided by ***** ("the Payroll Company") makes a distinction between above-the-line and below-the-line employees. Virginia does not distinguish between above-the-line and below-the-line employees for purposes of the Motion Picture Production Tax Credit and, therefore, no such distinction is made in this analysis.

Box and Equipment Rentals

A box or equipment rental fee is an amount that an employee charges an employer for the use of the employee's tools or equipment. Amounts paid to reimburse employees for providing their own tools, supplies, and equipment to perform work for the employer are generally considered wages subject to withholding (Rev. Ruling 2002-35, 2002-1 C.B. 1067). However, if the payment meets the requirements set forth in IRC § 62(c) and Treas. Reg. § 1.62-2(c)(1), it is treated as an accountable plan and is excluded from the IRC § 3401 definition of wages. Therefore, as long as a box or equipment rental fee is not considered an accountable plan under federal law, it may be considered compensation and wages that is treated as a qualifying expense for purposes of the base credit. This is true regardless of whether the employee is a Virginia resident. Fees paid to Virginia residents may also qualify as wages for purposes of the two additional Virginia resident credits.

Even if a box or equipment rental fee is treated as an accountable plan and thus does not qualify as compensation and wages, it could still be considered a qualifying expense for purposes of the base credit if the payment is for the lease of property from a qualified vendor that is actually and physically provided, supplied, consumed or used within Virginia. A qualified vendor is defined in the Motion Picture Production Tax Credit Guidelines as an individual or business entity that provides goods and services that it provides in its ordinary course of business to a qualified motion picture during production; maintains a physical place of business in Virginia; and is qualified to do business in Virginia. Accordingly, box or equipment rental fees paid to employees that are treated as accountable plans may qualify for the base credit if they meet these requirements. Such payments would not qualify as wages for purposes of the two additional Virginia resident credits.

State Unemployment Insurance and Federal Unemployment Insurance

Neither the federal nor Virginia unemployment taxes are compensation and wages for purposes of the base credit or the two additional Virginia resident credits because they are only imposed on the employer. Supplemental unemployment compensation benefits paid to an individual may be compensation and wages to the extent that such benefits are includable in the gross income of the employee. State unemployment compensation benefits that qualify as compensation and wages qualify for the base credit and may also qualify for the additional Virginia resident credits, to the extent that such payments are made to qualified Virginia residents.

FICA Taxes

The employer's portion of FICA taxes is not compensation and wages for purposes of the base credit or the two additional Virginia resident credits because FICA taxes are imposed directly on the employer and are not considered remuneration paid to the employee. The employee's portion of FICA taxes may be compensation and wages for purposes of the tax credit if the employer pays the employee's portion of the tax without deduction from the remuneration of, or other reimbursement from, the employee. In this case, such wages may be included for purposes of the base credit and the additional Virginia resident credits. If an employee pays his entire portion of FICA taxes, such taxes cannot be considered compensation and wages for purposes of the base credit or the two additional Virginia resident credits.

Workers' Compensation Insurance

Any premiums paid by an employer for workers' compensation coverage are not considered wages for federal withholding purposes and are not qualifying expenses for purposes of the two additional Virginia resident credits. However, such premium payments may qualify for the base credit to the extent that the expenses are related to the production of a Virginia film and are considered amounts spent in Virginia. Expenses will be considered amounts spent in Virginia if the insurance services are performed within Virginia.

Pension Contributions

Federal law excludes qualified pension, profit-sharing, and stock bonus plans (under IRC § 401), qualified employee annuity plans (under IRC § 403(a)), simplified employee pension plans (under IRC § 402(h)), simple retirement accounts (IRC § 408(p)), and eligible deferred compensation plans from the definition of "wages" for federal withholding purposes. Accordingly, payments to these types of plans do not qualify as wages for purposes of the two additional Virginia resident credits. Payments to such plans may qualify for the base credit to the extent that such expenses are related to the production of a Virginia film and are considered amounts spent in Virginia. Expenses will be considered amounts spent in Virginia if the pension services are performed in Virginia.

Health Insurance Premiums

Health insurance premiums paid by an employer are excluded from an employee's gross income in IRC § 106 and do not qualify as wages for purposes of the two additional Virginia resident credits. However, health insurance premium payments may qualify for the base credit to the extent that the expenses are related to the production of a Virginia film and are considered amounts spent in Virginia. Expenses will be considered amounts spent in Virginia if the health insurance services are performed in Virginia.

Paid Holidays and Paid Vacations

Paid holidays and vacations qualify as compensation and wages for purposes of the tax credit because they are considered wages for federal withholding purposes. Treas. Reg. § 31.3401(a)-1(b)(3) states that the salary of an employee on vacation, paid notwithstanding his absence from work, constitutes wages for purposes of IRC § 3401. The same logic can be applied to holiday pay. Accordingly, both expenses qualify for the base credit, so long as such payments are related to the production of a Virginia film. Such expenses also qualify as wages for purposes of the additional Virginia resident and Virginia first-time industry employee credits to the extent that they are related to employees that are Virginia residents and first-time industry employees, respectively.

Meal Per Diem Payments

The value of meals furnished to an employee by his employer is included in wages for withholding purposes if the value of the meals is included in the employee's gross income (Treas. Reg. § 31.3401(a)-1(b) (9)). Accordingly, taxable meal per diem payments would be included as compensation and wages for purposes of the base credit. Such taxable payments would also qualify as wages for purposes of the two additional Virginia resident credits to the extent that the payments are made to employees who are Virginia residents and first-time industry employees, respectively.

Any meals provided by an employer are not considered wages for withholding purposes if the value of the meals is excludable from the employee's gross income. Treas. Reg. § 31.3401(a)-1(b) (9). Such nontaxable meal per diem payments would not be included as compensation and wages for purposes of the base credit or the two additional Virginia resident credits. However, meal expenses may qualify for the base credit to the extent that the expenses are related to the production of a Virginia film and are considered amounts spent in Virginia. Expenses will be considered amounts spent in Virginia if meals are purchased from a qualified vendor (as defined in the Motion Picture Production Tax Credit Guidelines) and are actually provided, supplied, consumed, or used within Virginia.

Lodging Per Diem Payments

The value of lodging furnished to an employee by his employer is included in wages for withholding purposes if the value of the lodging is included in the employee's gross income (Treas. Reg. § 31.3401(a)-1(b)(9)). Accordingly, taxable hotel per diem payments would be included as compensation and wages for purposes of the base credit and, to the extent that they were paid to qualified Virginia residents, the two additional Virginia resident credits.

Any lodging provided by an employer are not considered wages for withholding purposes if the value of the lodging is excludable from the employee's gross income. Treas. Reg. § 31.3401(a)-1(b)(9). Such nontaxable hotel per diem payments would not be included as compensation and wages for purposes of the base credit or the two additional Virginia resident credits. Although the value of nontaxable hotel per diems would not be considered compensation and wages, these payments could be included as qualifying expenses for purposes of the base credit to the extent they are related to the production of a Virginia film and are considered amounts spent in Virginia. Such expenses would not qualify as wages for purposes of the two additional Virginia resident credits.

Payroll Handling Fees

Payroll service fees are not compensation and wages and do not qualify for the two additional Virginia resident credits. However, such fees may qualify for the base credit to the extent that such payroll services are performed within Virginia and are directly attributable to the production of a motion picture filmed in Virginia. To meet such qualifications, the payroll company must actually process the payroll within Virginia and the fees must be related to compensation and wages that are also qualified expenses. Any payroll service fees associated with non-qualifying wages (for example, fees associated with the portion of an employee's salary that exceeds the $1 million cap) would not qualify for the tax credit. The $1 million salary cap includes all fringe benefits that qualify as compensation and wages for purposes of the base credit.

You also requested clarification regarding whether the Payroll Company's "Payroll Handling Fees" qualify as expenses for purposes of the base credit. More information regarding these expenses would need to be provided before we could determine whether they qualify for the tax credit. The Payroll Company's payroll handling fees may qualify for the base credit if the above requirements are met. If the Payroll Company is not processing payroll in Virginia, the payroll fees that it charges are not qualified expenses.

I hope that this has addressed your inquiry. The Code of Virginia sections cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. If you have additional questions, please contact ***** in the Office of Tax Policy, Policy Development Division, at *****.

• • • • • • • • Sincerely,

Craig M. Burns
Tax Commissioner