DeJongh vetoes bill protecting tax benefits for RT Park tenants
Published: May 19, 2014
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ST. THOMAS - Gov. John deJongh Jr. struck down a controversial measure Friday evening to protect the tax incentive benefits of University of the Virgin Islands Research and Technology Park tenants.
RT Park tenants do not pay Gross Receipts Taxes and they get substantial reductions on their corporate income tax liability. Two recent V.I. attorney general opinions found many of the park's tenants are not eligible to receive the park's tax breaks.
The measure, offered by Senate President Shawn-Michael Malone at an April 24 Senate session, attempts to fix the problem and protect the existing benefits for park tenants.
The measure was an amendment to a bill the governor originally sent to the Senate merging the Economic Development Bank with the Small Business Development Agency.
In order to veto the RT Park measure, he had to veto the whole bill, calling the situation an "unfortunate quagmire."
DeJongh said the amendment undermines the foundation upon which the RT Park was created.
"Specifically, the amendments are objectionable to the extent that not only do they radically alter the policies and procedures of both the RT Park and the Government generally with respect to encouraging economic development through the targeted use of tax incentives, they contain substantial drafting errors that would and should be corrected if an appropriate process is implemented for such revisions of law as may be deemed needed and affordable," deJongh wrote in his transmittal letter to Malone.
Malone sponsored the tech park amendment, and all 15 senators supported it.
Since it was passed in April, the "Malone amendment" has caused a stir in the community, prompting St. Thomas-St. John Chamber of Commerce President Sebastiano Paiewonsky Cassinelli to publicly oppose the measure, saying it is bad for the territory's economic development.
Attorney general opinions
V.I. Attorney General Vincent Frazer has issued three legal opinions on the tech park since August, all in response to questions posed by deJongh.
Government House spokesman Jean Greaux Jr. said Friday that the governor was concerned that the territory was losing out on millions in Gross Receipts Tax revenues because tax breaks were being offered through the RT Park to tenants who did not qualify for them under the law.
"He wanted to get a clear understanding of whether the RT Park was functioning as it was originally intended," Greaux said.
Frazer's first opinion, dated Aug. 23, 2013, found that the RT Park does not have legal authority to enter into lease agreements with "virtual tenants," and such tenants are not eligible to receive the park's tax benefits.
The RT Park was established through legislation in 2002, but did not begin to produce significant revenue until 2009. It received substantial General Fund appropriations until 2012, the first year it was able to be self sufficient.
A $13.5 million physical building, called the 64West Center, is on UVI's St. Croix campus and was built and opened last year. However, because the park was operational for a decade before it had a building of its own, many of the park's tenants do not operate out of the new building.
In January, Frazer put out a second opinion, clarifying what kind of businesses are eligible for RT Park benefits.
After analyzing the statute, Frazer found that Internet service providers and cable television providers do not fall within the law's definition of either a "knowledge-based business" or an "electronic commerce business," two categories of business authorized to receive benefits under the RT Park statute.
The third opinion is dated March 12, and finds that if the virtual tenants have an agreement or lease to share common space, they can qualify for tax breaks.
Frazer told The Daily News that until a court rules otherwise, an attorney general opinion is treated as law.
Letters to tenants
The territory's three largest telecommunications companies - Broadband VI, Choice Communications, and Innovative's Internet and cable divisions - are all virtual tenants of the RT Park. They operate out of their own offices, and yet do not pay any Gross Receipts Taxes and very little corporate income tax.
Based on the attorney general's opinion, the V.I. Bureau of Internal Revenue sent letters to the companies informing them that their tax breaks are not legal and any benefits will expire Dec. 31. The tenants were urged to schedule an appointment to meet with the bureau to discuss any change in tax obligation.
Other tenants received letters from the RT Park itself informing them that as virtual tenants they are no longer eligible for tax breaks.
Larry Williams of LnL Publishing was one of these tenants.
"We're just shocked that we did all the things we were supposed to do and suddenly the tax benefits were pulled away from us," he said.
Even worse, the attorney general's opinion came out in August, and the RT Park continued to take LnL Publishing's money until January, when the letter was sent, Williams said. In lieu of a fixed rent, Williams, like the other tenants, pays the tech park a percentage of earnings.
He said when they joined the tech park in 2011, there was no building to lease office space from, and they did not know that it was illegal not to.
"There was no building when the Senate put together the tech park," Williams said. "If we had known that, we would have done that."
Malone's amendment addresses the attorney general's opinions by broadening the legal definition of electronic commerce and allowing virtual tenants to receive benefits.
The new definition is broad: "Electronic commerce, or e-commerce, means transacting or facilitating business or providing the means to transact or facilitate business on a communications network including, but not limited to, the Internet."
Under the new definition, a company need only facilitate e-commerce to qualify, and it does not have to be over the Internet, but any type of communications system. That opens the definition, and therefore the tax breaks, to Internet service providers and telephone and cable companies.
It also specifies that lobbyists and consultants who work for telecommunications companies affiliated with e-commerce are able to receive tax breaks.
The measure adds to the definition of the park itself under the V.I. Code, expanding it to include not just the physical space, but any lease, contract or license rights acquired by the park or its partners to servers or telecommunication services that may provide a "data cloud" from the park to its tenants.
The amendment contains a provision that allows existing V.I. licensed businesses to apply for RT Park benefits.
The last section of the amendment requires the Economic Development Commission to refer applications to the RT Park if the business falls under the e-commerce or knowledge-based business categories.
In a letter to the editor published in Friday's V.I. Daily News newspaper, Malone said the Legislature remains a strong supporter of the RT Park and passed the amendment in order to save the park and the benefits it brings to the territory.
When reached Friday he refused to make further comment on the matter.
Cassinelli, as president of the St. Thomas-St. John Chamber of Commerce, said the amendment is far too substantial to have been tacked on to another bill and passed without a full hearing process.
He also criticized the RT Park benefits for being decided by a board that makes the decisions in secret, as opposed to the EDC benefit process, which includes a public notification and hearing process.
Changing the requirements so that tenants do not have to be physically located at the park removes the economic and educational benefit to St. Croix, which was the whole purpose for the tech park in the first place, Cassinelli said.
RT Park beneficiaries say that having the government give, then take away tax incentives sends a very bad message to anyone looking to invest or bring business to the territory.
"The government's credibility is shot," Williams said.
Neil Prior, chairman of Atlantic Tele-Network, the parent company of Choice Communications, said he was shocked by the chamber's very public reaction. He said problems with the tax incentive programs in the Virgin Islands are a boon for Puerto Rico, which has recently stepped up its incentive programs and already lured away several businesses, including large employers like Seaborne Airlines.
He said he does not know if the opinions expressed by Cassinelli are sanctioned by the full board. If the chamber's board backs Cassinelli's views, Prior said his company would resign as a member of the chamber.
Bill Neville III, managing member of EDC beneficiary U.S. Viking, is also an investor in Broadband V.I., one of the Internet service providers affected by the RT Park legislation.
In response to criticism of the Malone amendment as unfairly protecting the three major ISP companies, he said it is about ensuring high speed Internet for the people of the territory.
He said since Broadband V.I. became a tech park tenant in 2009 - two years before he became affiliated with the company - Internet speeds have increased 15 times what they were and employment at the company has doubled. The company also provides computer courses through the UVI Community Engagement and Lifelong Learning program.
"Competition is good for the market, it's good for consumers, I don't see it as a negative," Neville said. "At the same time, the ISPs do need to stay healthy."
The completion of the V.I. Next Generation Network open broadband network will open the market for Internet service to smaller players who would not be able to build their own networks. The government's broadband network allows anyone to form an ISP business, buy bandwidth from the network and sell it to consumers without the liability or expense of creating and maintaining its own infrastructure.
He and Prior both said if the amendment is not overridden by the Senate, and the companies had to start paying Gross Receipts Taxes, it would seriously impact the future of the companies in the territory.
Representatives from Innovative declined to comment for this article.
In a separate letter to Malone, sent Friday, deJongh expounded on his view of the RT Park and the measure he vetoed, saying it would have broad and unfortunate consequences for the territory.
He said the RT Park has gone off track and his administration, UVI and the RT Park itself have been working quietly for the last few years to reconcile the park with the law and the practical realities of the ever-changing technological world.
DeJongh said the resignation of two RT Park board members - Hank Smock and Ed Thomas - raised a red flag. The governor said they resigned over matters that were "of deep concern to them."
"Their actions of conscience merited follow-up inquiry and corrective action. Indeed these efforts led not only to the 2012 change in the law which required the decisions by RT Park to award tax incentives to be reviewed by the Governor, but also to the series of Opinions of the Attorney General which have clarified where issues were raised by the language of the law," deJongh wrote.
"All of these efforts, however, have been made moot by the stealth action of the 30th Legislature in passing Bill No. 30-0302 without any public discussion," he said.
DeJongh said the amendment threatens the EDC program and robs the territory's treasury of much-needed tax revenue from the three ISPs that are tenants of the park.
"This last action not only unilaterally took tax-paying entities off the tax rolls but has put smaller and locally owned and managed businesses at a very unfair disadvantage in this new and developing industry by forcing them to compete against larger companies which do not have to pay the taxes the smaller businesses must pay," he said.
The governor also expressed concern about how the move could be seen by Congress. The territory has already been fighting for years to prove the legitimacy of tax incentive programs like the EDC, and opening up the RT Park could set the V.I. government back.
He urged senators to conduct a full public hearing process on the legislation.
"This path will avoid the political bloodbath that will follow if reason is not permitted to prevail in the full light of an open discussion and review. Our budget crisis is too dire - and our resources too limited - for us to do less on behalf of all residents of the Virgin Islands. Surely we can work together to achieve a better result," deJongh said.
- Contact reporter Aldeth Lewin at 714-9111 or email email@example.com.