- DC Office of Tax and Revenue Launches New QHTC Sales and Use Tax Exemption Application/Pre-Certification Process
- October 31, 2017 | Authors: Hanish S. Patel; Evan M. Hamme; Jonathan A. Feldman; Michele Borens; Jeffrey A. Friedman; Chelsea E. Marmor; Todd A. Lard; Maria M. Todorova; Carley A. Roberts; Ted W. Friedman; Douglas Mo; Nicholas J. Kump; Eric J. Coffill; DeAndre R. Morrow; Andrew D. Appleby; Debra L. Salvato; Open Weaver Banks; Scott Wright; Timothy A. Gustafson; Jessica A. Eisenmenger; Charles C. Kearns; Dmitrii Gabrielov; Jessica N. Allen; Michael J. Kerman; Christopher Beaudro; Huy Mike N. Le; Todd G. Betor; Robert P. Merten; Nicole D. Boutros; Suzanne M. Palms; Justin T. Brown; Alla Raykin; Charles C. Capouet
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On November 1, 2017, the District of Columbia will begin implementing a new sales and use tax exemption application process for Qualified High Technology Companies (QHTCs). Previously, QHTCs could provide sales and use tax exemption certificates to sellers while attaching completed QHTC-CERT forms to their tax returns.1 The new application procedure signifies a shift to essentially a pre-certification process and creates new documentation requirements for companies seeking QHTC benefits.
The District provides a variety of tax benefits to QHTCs, including sales and use tax2 and personal property tax exemptions,3 as well as a reduced corporation franchise tax rate.4 In order to qualify as a QHTC, a business must:
- Be an individual or entity organized for profit;
- Lease or own an office in the District;
- Have two or more qualified employees within the District;
- Derive at least 51% of its gross revenues earned in the District from certain high technology-type activities; and
- Be registered with the DC Government as a business.5
In particular, the District exempts from sales and use tax all sales to a QHTC of computer software or hardware, and visualization and human interface technology equipment, including operating and applications software, computers, terminals, display devices, printers, cable, fiber, storage media, networking hardware, peripherals and modems when purchased for use in connection with the operation of the QHTC.6 In order to purchase these items tax-free, QHTCs must provide the seller with an FP-337 Exempt Purchase Certificate.
Online Application for QHTC Exempt Purchase Certificate
Beginning November 1, 2017, companies must file an annual online application in order to obtain the QHTC Exempt Purchase Certificate. The new application will be available on MyTax.DC.gov and requires a significant amount of information in addition to the current requirements on the QHTC-CERT form. Much of this new information is not required to be reported by statute, but the District’s Office of Tax and Revenue (OTR) recently finalized regulations requiring the expanded disclosure of information.7 Before an exemption certificate is granted, the Office of Tax and Revenue must first approve the application. The application requirements include:
- Identifying Information: Taxpayer ID, name, address, sales tax account number, NAICS code, and an explanation of principal business activity;
- Financial Information: Gross revenue, gross revenue earned from QHTC activities within the District, and the amount of QHTC exempt sales and purchases from the prior year;
- Documentation of District Office and Employees: Proof of a District office location, such as a lease agreement or proof of ownership, and proof of at least two District employees, such as a copy of the previous quarter’s unemployment report; and
- Job Creation Information: The number of QHTC employees hired and jobs created, and the number of QHTC employees hired who are District residents.
Eversheds Sutherland Observation
The Office of Revenue Analysis is currently examining whether the QHTC tax benefits achieve their economic development purpose and whether the same effects would have occurred without the QHTC benefits. Following the completion of the study, the Office of the Chief Financial Officer (OCFO) may make recommendations to the DC Council. The new job creation questions may have been formulated to gather information to aid this study and determine whether the OCFO will recommend any changes to the QHTC eligibility requirements or tax benefits.
New QHTC Exempt Purchase Certificates will be valid for one year and will expire on January 31 of each year. Any previously held certificates will expire on January 31, 2018. The new application process will only impact sales and use accounts, but the OTR expects that the online application will expand to other tax types beginning next year. It is unclear whether a taxpayer must complete the online application if it takes the QHTC benefit of selling intangible property or services tax-free, but does not make tax-exempt purchases and, thus, does not require the Exempt Purchase Certificate.
Eversheds Sutherland Observation
Historically, taxpayers have self-certified as QHTCs by completing the QHTC-CERT form and attaching it to their respective tax returns. The sales and use tax exemption certificate online application requirement is a shift to a pre-certification process. Thus, the OTR may reject companies’ applications now, rather than audit them later.
This pre-certification process may result in higher scrutiny of companies’ QHTC status. Because the OTR claims it will process each application within only one business day, it may strictly construe the application’s requirements and deny QHTC status to all applicants that do not clearly satisfy each requirement.
1 See D.C. Mun. Regs. tit. 9, § 1101.1; FR-399, Qualified High Technology Companies, D.C. Office of Tax & Revenue (rev. Sept. 2016).
2 See D.C. Code Ann. §§ 47-2001(n)(2)(G), 47-2005(31); D.C. Mun. Regs. tit. 9, § 1111.
3 See D.C. Code Ann. § 47-1508(a)(10); D.C. Mun. Regs. tit. 9, § 1112.
4 See D.C. Code Ann. § 47-1817.06.
5 See D.C. Code Ann. § 47-1817.01(5)(A); FR-399, Qualified High Technology Companies, D.C. Office of Tax & Revenue (rev. Sept. 2016). The term “Qualified High Technology Company” excludes: (1) individuals or entities that derive 51% or more of their gross revenues from the operation in the District of: (a) an online or brick and mortar retail store; (b) an electronic equipment facility that is primarily occupied, or intended to be occupied, by electronic and computer equipment that provides electronic data switching, transmission or telecommunication functions between computers, both inside and outside the facility; or (c) a building or construction company; (2) a professional athletic team; and (3) a business entity located in the D.C. Ballpark TIF Area. See also D.C. Code Ann. § 47-1817.01(5)(B).
6 See D.C. Code Ann. § 47-2005(31); D.C. Mun. Regs. tit. 9, § 1111.3. See also FP-337, Qualified High Technology Company – Exempt Purchase Certificate, District of Columbia Sales and Use Tax, D.C. Office of Tax & Revenue. The District also exempts from sales and use tax sales within the District by QHTCs of “intangible property or services otherwise taxable as a retail sale or sale at retail, including Internet-related services and sales, including website design, maintenance, hosting, or operation; Internet-related consulting, advertising, or promotion services; the development, rental, lease, or sale of Internet-related applications, connectivity, digital content, or products and services; advertising space and design; graphic design; banner advertising; subscription services; downloads from databases; services that involve the provision of strategic advice for Internet use and presence; Internet website design and maintenance services; Internet website assessment and diagnostic services; the use of proprietary content, information, and other services as part of a package of Internet advice and consulting services.” See D.C. Code Ann. § 47-2001(n)(2)(G).7 See D.C. Mun. Regs. tit. 9, § 417.10(d).