Dozens of Uintah and Duchesne County businesses thought they were cutting their tax load when they received tax credits through the Enterprise Zone Program. Now, three years later, they have all been audited and many are being asked to pay back taxes and fines.

“We’re approaching 100 percent in Uintah County,” state Rep. Kraig Powell, R-Heber City, said. “Almost every single business who filed for the Enterprise Tax Credit has been audited.”

The promise of a tax audit is hardly an incentive for becoming involved in a program that was designed to encourage economic development in rural areas of Utah. Under the plan, certain types of businesses locating to or expanding in a designated zone may claim state income tax credits provided in the law.

Irene Hansen, executive director of the Duchesne County Area Chamber of Commerce, encouraged the application of Basin counties to become eligible for Enterprise Zone designation. Application for designation must be made by a city with 10,000 or less population located in a county with 50,000 or less population. The applications are reviewed and approved on the basis of economic development need and other considerations based on a variety of economic distress factors.

With the nightmare facing so many local businesses, this designation doesn’t seem particularly advantageous. The credits, designed to give aid to Utah counties in economic distress, have been widely disallowed — costing individual Basin businesses as much as $100,000.

To rectify this problem, Hansen, Powell, Basin accountants, Uintah County representatives and business owners met at the State Capitol last week to propose new legislation in response to the aggressive audits on the Enterprise Zone credits.

Powell explained that the group identified several issues within the tax code that are problematic.

“This is not the typical way that you start legislation,” Powell admitted, “but I wanted a group there that really understood what needed to be done.”

The assembly agreed that clarification should be given to what constitutes a “retail business.” According to the tax commission, anyone who charges sales tax is a retailer.

“The statutes said you can’t take the tax credit if you are in retail,” Powell explained. “There are several companies whose main business isn’t retail, but on a periodic basis they will sell a piece of equipment or try to get rid of old inventory. The auditors are saying, ‘You sold something last year. You are engaging in retail trade, so you can’t get the tax credit.’ ”

A hotel that had expanded was excluded from eligibility because they charged sales tax.

“I never thought of a hotel as a retail business,” Hansen said. Then she explained how a cheese-producing company could also lose their tax credits.

“If they have a little window where they sell cheese curds, that might only be 1 or 2 percent of their business,” Hansen explained. “The tax commission says if you have one retail sale, you are a retailer. Suddenly this business becomes ineligible.”

A bottling company, whose primary business is manufacturing, had a few local vending machines. They were suddenly labeled “retail” and no longer qualified for the tax credit.

Another concern aired in the meeting was how many employees a business must have to qualify.

“If a welder adds a $200,000 building so he can house more equipment, he spent money he thought would partly be covered by the tax credit,” Hansen suggested. “But then he finds out he has to hire an employee, too.”

As the group spent two hours explaining their concerns, Jim Wilson from Legislative Research and General Counsel, took detailed notes which will be used to help draft legislation designed to better clarify for both the tax commission and business owners what the absolute standards are.

Rich Mahoney, a CPA’s with MainStreet Tax & Accounting Services in Vernal, was present at the meeting and made this observation, “It has become very apparent to the politicians that the holes in the current policies and requirements surrounding the Enterprise Zone credits will require a legislative fix. With our suggestions out on the table, it is up to the lawmakers to decide if and how to implement them.”

Dan Smith, marketing manager for MainStreet, explained why a legislative fix is essential.

“These particular audits are significantly different than when an individual faces such scrutiny,” Smith said. “You might have been randomly selected or for whatever reason you get chosen, you meet with the auditor and show your documents. You get to defend yourself and then a decision is made whether or not you owe. Our EZ clients are just getting a letter in the mail saying, you have been audited and you owe this much. There is no representation.”

After receipt of this letter a business may file an appeal.

“All of those appeals are being knocked down,” Smith explained. “So you have to go to tax commission court. The case we are working with took almost a year to get to the court. Many of the CPAs are saying we can’t fight it. They are right. There is no way to get it done without working through the legislature and tax commission.”

The case that MainStreet finally presented in court this past June dealt with whether or not a managing owner of a business is considered an employee of the business.

Rich Mahoney, a CPA with MainStreet, said, “The conflict we are dealing with is that the state’s rules for eligibility are unclear and the definitions they use conflict with years of common practices and federal court rulings.”

Powell is pushing to see an actual bill ready to be introduced in January when the legislature reconvenes.

“The fact that this legislation is now being prepared is going to allow the people that have pending audits and pending appeals additional time to prolong their decisions (about paying the back taxes and fees),” Powell said.

The District 54 representative has been in politics long enough to understand that there are no certainties about how the new legislation would affect pending appeals.

“The laws are complicated about retroactive cases,” Powell said. “But the fact that the new legislation is proposed and pending might change some of the decisions that are on appeals.”

Powell hopes this will be the case.

“These small businesses are a big producer of economic development,” he said. “Many of them were encouraged to locate in Uintah and Duchesne precisely because of the credit. They joined this program. They tried to play ball. We ought to take care of them.”

Enterprise Zone program benefits

According to the Governor’s Office of Economic Development , the following nonrefundable Utah tax credits apply to qualifying Enterprise Zone businesses:

1) $750 for each new full-time position filled for at least six months of a tax year.

• An additional $500 if the new position pays at least 125 percent of the county average monthly nonagricultural payroll wage for the respective industry (determined by the Department of Workforce Services).

• An additional $750 if the new position is in a business that adds value to agricultural commodities through manufacturing or processing.

• An additional $200 for two consecutive years for each new employee insured under an employer-sponsored health insurance program (the employer must pay at least 50 percent of the premium cost for two consecutive years).

2) A 50 percent credit up to $100,000 for cash contributions made to a private nonprofit corporation exempt from federal income tax under IRS Section 501(c)(3), whose primary purpose is community and economic development (must be accredited by the Utah Rural Development Council Board of Directors).

3) A 25 percent credit of the first $200,000 spent on rehabilitating an enterprise zone building that has been vacant for two years.

4) 10 percent of the first $250,000 and 5 percent of the next $1,000,000 of an annual qualifying investment in plant, equipment, or other depreciable property.