Legislature winds down old program that made tax refunds to big projects

By Bob Mercer

State Capitol Bureau

PIERRE – For the past decade, state government carried tens of millions of dollars on the books year after year waiting for companies to come looking for tax refunds they were owed on big projects in South Dakota.

This spring, that practice will end.

The governor signed into law last week an emergency act passed by the Legislature setting a May 1 deadline for all claims to be filed.

Any money remaining afterward – if there is any – will go to general use.

It is the last act in what began as a very secretive program. For years the state Revenue Department of the Rounds administration treated as confidential the refund amounts and the names of the companies receiving them.

Not even legislators could find out the details.

That changed in 2009. A reporter for five daily newspapers successfully challenged Revenue for access to the permits that companies needed to obtain as a first step to qualifying for the refunds.

As that appeal moved forward, the Legislature declared the amounts of the refunds and the identities of the projects and the companies to be public records.

When all of that information became available, the Legislature decided in 2010 to end the program altogether. Lawmakers set an ending date of Dec. 31, 2012.

In 2011, new Gov. Dennis Daugaard convinced enough Republicans in the Legislature to approve a similar new program. But Democrats successfully petitioned for a referendum, and South Dakota voters overwhelmingly rejected it in the November 2012 elections.

The refund program wound up costing the state treasury more than $99 million through Dec. 31, 2013.

Approximately $30 million of potential liabilities are still on the state’s books for the program, however.

The Legislature set a definite window for refunds to be processed for projects that qualified after the 2010 decision to end the program.

But there wasn’t a cut-off for older projects. The emergency law taking effect this spring sets the deadline for them at May 1.

Approximately $30 million remains on the books as potential liabilities. The governor has built $19.4 million of the leftover into his budget plans. Another $10 million or so is still in play.

The new law, HB 1070, cruised through the House of Representatives 66-2 and the Senate 31-1.

“We worked with the Department of Revenue to send out letters to any projects that would be affected by this,” said the legislation’s prime sponsor, Rep. Mark Mickelson, R-Sioux Falls.

The Building South Dakota program that was approved by the Legislature in 2013 includes a reinvestment provision that replaces the refund program.

Under the old program companies automatically qualified for refunds if they met requirements set in state law and filed to get their money back. It didn’t matter whether the refund was important to the decision to build the project in South Dakota.

The new reinvestment approach allows the state Board of Economic Development to decide whether some amount of tax refund is important to the project locating in South Dakota.

“The issue with the (old) program is there was no discretion in it,” Mickelson said.

Legislators on the appropriations committee last year found that $35 million of liability for state government had accrued in potential refunds.

“Any money that is left over will be transferred to the state general fund,” Mickelson said. “I don’t think there’s much money expected to be left over beyond the $19.4 million in the governor’s budget.”

Jim Terwilliger, the economist in the state Bureau of Finance and Management, said there were projects eligible for refund payments without a deadline. The new law puts a deadline on those, he said.

There is $30 million in the fund and $19.4 million is proposed to be used, with the balance of approximately $11 million expected to paid out in the next few months before the deadline, Terwilliger said.

Originally the hope was that refunds would be paid out the same year that projects’ taxes were paid in, according to Sen. Larry Tidemann, R-Brookings.

“All of these operators have been notified,” Tidemann said.

“If they do not make the request, those dollars then will go into the general fund,” he said. “It makes them move forward and it removes this future liability we have at the current time.”

The only legislators to vote no were Rep. Stace Nelson, R-Fulton; Rep. Lance Russell, R-Hot Springs; and Sen. Jeff Monroe, R-Pierre.

Meanwhile the Board of Economic Development has approved three of the four reinvestment-refund requests it’s handled since mid-2013:

  • 3M Brookings received approval for a 60 percent refund of the sales and use taxes paid for equipment under the reinvestment program, up to $234,000, at the board’s Aug. 13, 2013, meeting;
  • Marmen Energy Company of Brandon received approval for a refund of all sales and use taxes paid on equipment under the reinvestment program, up to $600,000, at the Aug. 13, 2013, meeting;
  • Novita Aurora received approval for a 60 percent refund of sales and use taxes paid on the entire facility under the reinvestment program, up to $771,082, at the board’s Sept. 11, 2013, meeting; and
  • CCL Label was denied a tax refund under the reinvestment program at the board’s Oct. 8, 2013, meeting.
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