Dell balks at tax credits

State officials are at odds with Dell Inc. over whether Dell must repay millions of dollars in tax credits that it received as part of a massive incentives deal.

North Carolina's secretary of revenue said that the state can recoup the money now that Dell has decided to close its computer-assembly plant in Forsyth County.

But Dell said yesterday that it is not required to reimburse the state for credits it received in past years.

"Our belief and our understanding is that we met the performance thresholds required for those incentives during those years, and no, we are not obliged to repay those," said David Frink, a Dell spokesman.

"Nor have we received any request from anyone at the state level of North Carolina to do so."

Dell was eligible for about $6 million in tax credits over the period from 2005 through 2007, according to the N.C. Department of Revenue. The amount of credits that the company actually claimed during those years is not public information, and neither the department nor the company would release it.

The tax credits — which essentially act as discounts on a company's annual tax bills were only one part of an economic incentives package that state and local governments

gave to Dell in 2004 to entice the company to build its new plant in Winston-Salem.

A larger portion of the incentives package came in the form of monetary grants from state and local ent it ies. Most of those grants had strings attached. By closing its plant after only four years, Dell violated the terms of its agreements, and it had to repay the grant money.

The company has done so in recent weeks. It repaid $26.5 million to city and county entities, and it repaid $1.5 million to the N.C. Department of Commerce. The tax credits, however, are a trickier issue. The company's position is that it qualified for tax credits in previous years by creating jobs and meeting other criteria during those years. Those credits can't be taken away after the fact, the company says. The position of the state is apparently the exact opposite.

Kenneth Lay, the state's revenue secretary, said in an interview this week that, because Dell no longer meets the criteria used to determine the tax credits, the state can now require the company to repay the money. The method for the state to recoup the money is to adjust Dell's future tax bills, including the tax return the company will file for 2009.

"For some of the credits, there are particular bars, and if you fall below the bar, then you're no longer eligible for that credit," Lay said in an interview. "So we would go back and adjust prior years' returns based on the fact that they're no longer eligible for that credit. It's called a lookback." It's unclear if the law is on the state's side.

For instance, some of the tax credits that Dell qualified for came from special legislation that the N.C. General Assembly passed in 2004 specifically for Dell. The legislation created a "major computer manufacturing facilities" tax credit.

That legislation does contain a provision under which a company would have to forfeit tax credits.

The language in the law reads: "If the taxpayer fails to create the required number of new jobs or to make the required investment, the information provided by the taxpayer on the application proves to have been false at the time it was given, and the person making the application knew or should have known that the information was false, the taxpayer forfeits any credits claimed under this Article with respect to the facility."

That language appears to refer only to eligibility requirements during the current year of a tax credit. The law says nothing about the state being able to retroactively force a company to forfeit tax credits that it legitimately qualified for in past years.

Also unclear is how the conflicting interpretations could be resolved. Would the state, for instance, sue Dell to try to force it to repay the credits? A spokesman for the N.C. Department of Revenue said yesterday that he could not get into specifics about an individual taxpayer.

"We do everything within our power to collect the taxes that are due the state in an impartial, uniform and efficient manner," the spokesman, Robert Whitt, said.

The issue is a political problem as much as a financial one. Politicians who supported major incentives for Dell assured the public that taxpayer money would be protected in the event that the new plant did not live up to expectations. And despite an acclaimed opening, the plant never lived up to those expectations.

Employment at the plant reached a high of 1,100, but Dell has been hurt by changes in the computer market, and the company announced on Oct. 7 that it would be closing the plant and laying off about 900 workers employed there.

After the company's announcement, Gov. Bev Perdue, a Democrat who supports economic incentives as a way to attract jobs, pledged to do everything in her power to recoup all of the money that the state gave to Dell during its brief tenure in North Carolina.

"We made it very clear to them — and they already understood it, quite frankly — that every red cent of incentive money had to come back to the people of North Carolina," Perdue said at the time. That may turn out to be more difficult than she would like.

"The primary point is, no, we do not owe a refund based on those tax credits," Frink, the Dell spokesman, said. "We have not been asked to make a refund."

jromoser@wsjournal.com
919-210-6794