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ECD Drafting ‘Clawback’ Clauses for Subsidy Agreements

A state agency that doles out millions in taxpayer dollars to businesses promising to make work for struggling Tennesseans is formulating procedures to take money back from companies that don’t deliver the good jobs.

The Department of Economic and Community Development is working out details of a “clawback” provision it plans to insert into FastTrack grant agreements, according to the agency’s communications director, Clint Brewer.

“It’s not the issue that businesses haven’t done what they said they’re going to do. The issue is we want to be following the best practices we can,” said Brewer, assistant ECD commissioner. “To do that, we have to be the best stewards of public money we can be.”

Most ECD contracts currently don’t include a clawback provision, said Brewer. The lack of such recourse was at one time a particularly frustrating state of affairs to Lt. Gov. Ron Ramsey, a Republican. Ramsey criticized the administration of Democratic Gov. Phil Bredesen for making deals like $101 million in handouts to Electrolux for hinting at the creation of 1,250 jobs, even though the formal arrangement explicitly disallowed state officials from trying to recoup taxpayer resources if the company failed to produce.

Brewer said the department is now “on the brink of beginning to use that language in a new standard FastTrack contract,” but wouldn’t say specifically when the agency would start.

“It has taken us the better part of the last 18 months – obviously with a lot of other things going on – to work through the process of determining what legal precedent and black letter law would allow,” he said.

Making businesses promise to give taxpayers back some of their money should not only be required, but be publicly disclosed, said Dick Williams, with Tennesseans for Fair Taxation, a pro-income tax coalition of progressive activists and public-sector union groups.

“If something doesn’t work out, then the taxpayers ought to get back some, if not all, of the money they gave them,” Williams said. “Certainly, we shouldn’t assume they’ll all be successful.”

This year, lawmakers agreed to more than double the FastTrack program to $80 million. Since 2006, the state has allotted an average of $38.5 million in tax dollars annually to the FastTrack program.

The program offers businesses grants or loans for expenses like job training, infrastructure improvement, equipment, and temporary office space related to relocation or expansion. The taxpayer money is funneled through local governments or their economic development branches to issue to companies.

Changing how grant contracts are written is one of a handful of changes economic development officials are talking about making this year.

Last week, the department loaded agency statistics and records online in an attempt to increase accessibility to government documents, with plans to add a searchable database and other features by the time legislators are back on Capitol Hill next year.

The new “Open ECD” website lists business and incentives information for state-issued FastTrack grants, tax incentives, TNInvestco projects and community block grants — and how many jobs the money has reportedly created.

None of the information is new, says Brewer, but it’s now accessible without having to file open records requests to look at them, “so you can see on the back end how those jobs have stood up.”

Open government advocates generally applaud the effort to make information easier for the public to get to, but warn that the website shouldn’t be a substitute for agencies filling specific open records requests.

“That’s commendable as long as that does not become a substitute for normal, routine public records requests,” said Frank Gibson, director of public policy for the Tennessee Press Association.

“My big concern about them is at some point (when) you make a public records request, they’ll say it’s on their website. But is all the information you’re asking about on their website?” he said.

Tennessee Coalition for Open Government Executive Director Kent Flanagan calls the site “a great starting point,” but says he’s waiting to see how good the department is at updating people who sign up for alerts when ECD documents are posted.

“It’s not about what happened three months ago. It’s about what happened this morning,” he said.

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Press Releases

Amazon Sales-Tax Waiver ‘a Sell-Out of TN Businesses’: TFT

Press Release from Tennesseans for Fair Taxation, May 7, 2011:

Legislators move to reverse Administration’s Amazon exemption from sales tax collection.

Senate Finance Committee chair Randy McNally and House Finance Committee chair Charles Sargent will amend their bills SB 529 / HB 136 to clarify that sales tax be collected by businesses that have any physical presence in the State. These bills will be heard in Senate Finance Committee at 8:30 AM on May 10, 2011 and in House Finance Subcommittee at 10:00 AM the same day.

Gov. Haslam’s administration has secretly ruled that Amazon, the giant Internet retailer, need not collect Tennessee sales tax from sales through its “drop shipping” warehouse operations being built in Hamilton and Bradley Counties. McNally’s amendment explicitly requires that “drop shippers” and other dealers who operate physically in Tennessee must collect sales tax on Tennessee sales.

At a time of deep budget cuts, the special exemption would forego several million dollars annually in state revenue. The amended bills would raise at least $11.6 million according to a preliminary fiscal note.

“The Administration waiver of sales tax collection by Amazon is especially outrageous, as well as unfair, because it was made in secret behind closed doors without any public comment or action by the State legislature,” said John G. Stewart, former chair of Tennesseans for Fair Taxation. “This is a sell-out of Tennessee businesses, as well as a denial of legitimate tax revenue at a time of serious budget shortfalls and program cuts. In our democracy the Governor should propose but the Legislature should decide and that is what is proposed here.”

Amazon has agreed to locate two distribution centers in Bradley County and Chattanooga, and has already received more than $30 million in tax incentives from the State of Tennessee as part of the deal. But Amazon.com also demanded an exemption on collecting the Tennessee sales tax and remitting these tax revenues to the state, as is required of all Tennessee businesses. This exemption is in addition to the significant subsidies and incentives it received from the Bredesen administration.

Gov. Haslam acknowledged last week that Amazon’s demands for an exemption had been accepted. An article in the Chattanooga Times Free Press stated: ‘Asked directly whether Amazon would not be required to collect sales taxes on purchases made by Tennessee customers, Haslam said, “That’s exactly right.”’

The sales tax exemption was initially proposed by the out-going Bredesen Administration in a public notice posted in the last days of December 2010. The notice scheduled a public hearing in February to consider a change to the Department of Revenue rule governing the taxation of drop shipments.

At the last minute, after Tennesseans for Fair Taxation had requested an opportunity to comment, the hearing was cancelled. Governor Haslam’s 45-day moratorium on rule-makings was cited as the reason for the cancellation. Rather than reschedule the hearing and receive public testimony, the Haslam Administration secretly granted the exemption without any public notice or involvement.

If the Administration’s decision is not reversed it will hurt local businesses that must follow the law and already struggle to compete with the online giant.

Attorney Brian Paddock, a TFT volunteer noted: “When I asked a Retail industry representative about the Amazon exemption he wrote me a note saying:

The retail community in Tennessee believes that any deal to exempt Amazon.com or any other online-only retailer from collecting state sales taxes is a bad deal.  We are working with the Governor and the state Legislature to convince them that all retailers deserve equal tax treatment.  We support new jobs in Tennessee but not at the expense of the existing businesses.

All Tennessee retailers want is a level playing field.  We want competition to be fair.  Tennessee’s consideration of a plan to exempt Amazon from collecting state sales tax does the exact opposite and retailers across the state are justifiably upset.

Why should Amazon be exempt from collecting state sales tax?  Why should the state government, which in Tennessee operates primarily off sales taxes collected by existing merchants, put those same merchants at a disadvantage?  Why does a Tennessean running a business in these challenging economic times have to include state sales tax on each purchase, collect it, track it and pay it to the state when the state says a competitor selling the same product does not?

Amazon.com wants to open distribution centers here and avoid collecting state sales taxes.  It’s wrong and it’s a bad deal. Tennessee’s retailers, big and small, deserve fair treatment and a level playing field.

“TennCare, higher education, and pre-K funding, among many other programs, are slashed in Gov. Haslam’s proposed budget, but revenue that could soften those cuts is not being collected by Amazon,” says Lorri Mabry of Antioch, Tenn. “It’s blatantly unfair and unwise. We need to collect all the revenue that is owed to the state – Tennesseans are hurting.”

Last week Gov. Haslam released his Jobs4TN plan with a focus on “assisting existing Tennessee businesses in expansions and remaining competitive.”

“The Amazon exemption flies in the face of the Administration’s professed objective of assisting Tennessee businesses,” said Katie Findley, a University of Tennessee (Knoxville) student. “All Tennessee businesses want is a level playing field and this decision gives a huge price advantage to Amazon.” Because of Tennessee’s high sales tax, small businesses already lose out to online and out-of-state competitors, and many retailers struggle to compete with Amazon, in particular.

Mabry and Findley also are members of Tennesseans for Fair Taxation, a statewide coalition of people and groups that support revenue with justice for all Tennesseans. TFT also supports the Out-of-State Sales Tax Act, sponsored by Sen. Beverly Marrero and Rep. Mike Stewart, which would require any out-of-state vendor selling more than $4,800 of goods annually to Tennesseans and using in-state affiliates to solicit those sales to collect the sales tax due on items sold.

The bill would override the administration’s backroom deal for Amazon, and would raise more than $100 million in additional revenue by requiring Amazon and any online or out-of-state vendor doing significant business with affiliate presence in Tennessee to collect sales tax.

Sen. Bo Watson has introduced a bill that would require “letter rulings” and “revenue rulings” like the one apparently made in the Amazon case to be open to the public. “Amazon can afford to collect the sales tax from its customers,” said Elizabeth Wright, executive director of TFT. “Tennessee can’t afford to exempt them from doing so. Any time one business doesn’t collect the taxes that are legitimately owed, other taxpayers must take up the slack, either in higher taxes or reduced government services.”

Lt. Gov. Ron Ramsey spoke out last week against the exemption, telling the Chattanooga Times Free Press, “It’s the one where you make an outright gift or do a sales tax exemption that no other business in the state has, those are the type of things that bother me,” Ramsey said. “This whole Amazon tax issue, that they’re not paying sales tax, I just don’t think that’s something that should ever have been agreed to.”