Montana Administrative Register Notice 42-1019 No. 16   08/28/2020    
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In the matter of the adoption of New Rules I through XIV pertaining to the Montana Economic Development Industry Advancement Act (MEDIAA)







TO: All Concerned Persons


1. On March 13, 2020, the Department of Revenue published MAR Notice No. 42-1019 pertaining to the public hearing on the proposed adoption of the above-stated rules at page 473 of the 2020 Montana Administrative Register, Issue Number 5.


2. On March 27, 2020, the department published an Amended Notice of Public Hearing on Proposed Adoption for MAR Notice No. 42-1019 at page 568 of the 2020 Montana Administrative Register, Issue Number 6, which rescheduled the hearing, notice accommodation, and comment deadline dates in response to Governor Bullock's March 15, 2020 Executive Orders 2-2020 and 3-2020 (Orders) providing for measures to combat the spread of the COVID-19 Novel Coronavirus.


3. On April 30, 2020, the department published a Second Amended Notice of Public Hearing on Proposed Adoption for MAR Notice No. 42-1019 at page 774 of the 2020 Montana Administrative Register, Issue Number 8, which modified the hearing to a videoconference format in further compliance with Governor Bullock's Orders.


4. On May 8, 2020, a public hearing was held via videoconference to consider the proposed rulemaking. The following commenters appeared remotely and provided oral testimony: JP Gabriel, Filmlites Montana, LLC; Christopher Cronin, producer; Denny Staggs, VisionHawk Films; and Steve Grover, Montana Studios, LLC. The following person appeared remotely but provided no oral testimony: Kathleen Rakela, filmmaker. The following persons provided formal written comments: JP Gabriel, Filmlites Montana, LLC; Steve Grover, Montana Studios, LLC; Kathleen Rakela, filmmaker; and Adam Morra, Vice President/Tax Counsel, Paramount Network.


5. The department has adopted New Rule III (42.4.3403), New Rule IV (42.4.3406), New Rule VI (42.4.3408), New Rule VII (42.4.3411), New Rule VIII (42.4.3412), New Rule IX (42.4.3413), New Rule X (42.4.3414), New Rule XI (42.4.3417), New Rule XII (42.4.3418), New Rule XIII (42.4.3419), and New Rule XIV (42.4.3420) as proposed.


6. The department has adopted the following rules as proposed, but with the following changes from the original proposal, new matter underlined, deleted matter interlined:


NEW RULE I (42.4.3401)  DEFINITIONS The following definitions apply to terms used in this subchapter:

(1) through (5) remain as proposed.

(6) "In-studio facility and equipment," for the purpose of claiming the additional 10 percent credit under 15-31-1007(3)(b)(vi), MCA, means:

(a)  a permanent, enclosed building or structure that a production company rents for a "qualified production activity," as defined under 15-31-1003(16)(a), MCA.; and

(b) equipment (i.e., personal property) that a production company rents for a "qualified production activity," as defined under 15-31-1003(16)(a), MCA.

The facility must not be used exclusively for storage and the equipment must be provided by the party renting the facility.

(7) through (16) remain as proposed.


AUTH: 15-31-1012, MCA

IMP: 15-1-201, 15-31-1012, MCA


NEW RULE II (42.4.3402)  MEDIA PRODUCTION TAX CREDITS - DETERMINATION OF CREDIT BASE (1) The media production tax credit is the sum of one or more of the production tax credits provided under 15-31-1007, MCA. The basis for each tax credit is determined separately.

(a) remains as proposed.

(b) Compensation, as described in 15-31-1003(3), MCA, can only be used in one of the credits provided in 15-31-1007(3)(b)(i) through (iv), MCA, and includes the portion of a payment to a loan-out company for personal services. Compensation incurred in Montana within six months from the beginning of principal photography of state certification of the production may be included.

(c) through (5) remain as proposed.

(6) Production expenditures for services not included in compensation may be included in production expenditures as follows.

(a) through (f) remain as proposed.

(g) The cost of lodging or housing paid in Montana to accommodate crew members, employees, actors, directors, writers, and producers to the extent the lodging facility is subject to the Montana lodging tax, as provided under 15-65-111, MCA, or is rental housing. Rental housing must be substantiated with a copy of the signed lease or rental agreement identifying the name and address of the landlord, the address of the rental, the stated term of the rental, and the rental amount. The cost of lodging or housing in Montana to accommodate individuals involved directly or indirectly in the marketing function of the state-certified production shall not be included.

(h) remains as proposed.

(7) Preproduction expenditures may be included:

(a) in the first tax year's expenditures if they are attributable to production expenditures and compensation incurred no more than six months prior to production certification by the Montana Department of Commerce and do not include any compensation of crew members, actors, directors, writers, or producers.

(b) through (13) remain as proposed.


AUTH: 15-31-1012, MCA

IMP: 15-1-201, 15-31-1012, MCA


NEW RULE V (42.4.3407)  TAX CREDIT FOR POSTPRODUCTION WAGES – CREDIT BASE (1) remains as proposed.

(2) When an employee is not paid an hourly wage, the postproduction company must provide an hourly cost of the employee compensation based on a regular work week. No wages may be included in the postproduction credit base if the same wages are already included in a production credit base.

(3) through (5) remain as proposed.


AUTH: 15-31-1012, MCA

IMP: 15-31-1012, MCA


7. The department has thoroughly considered the comments and testimony received. A summary of the comments received, and the department's responses are as follows:


COMMENT 1: Mr. Grover made a general comment stating that it appears the department is adding "qualifying expense" rules to the administrative process. Mr. Grover's understanding was that ". . . [the Department of] Commerce would provide the rules for qualifying expenses and [the Department of] Revenue would provide the administrative rules necessary to implement the issuance of the tax credits and ensure compliance."


RESPONSE 1:  The qualification of expenses for a tax credit is a statutorily designated duty of the department under the Montana Economic Development Industry Advancement Act (MEDIAA), where the Department of Commerce is required, in addition to other duties under MEDIAA, to review production company applications and to certify media production projects.

Any administrative rules promulgated by the department pertaining to "qualifying expenses" are authorized and implemented under MEDIAA and lie within the department's primary statutory duties regarding the general supervision, enforcement, and taxpayer compliance with the tax laws of Montana, as described in 15-1-201, MCA.


COMMENT 2: Mr. Grover questioned the language in the last sentence of the definition in New Rule I(6) as "why can't the facility rent the equipment and the facility?"


RESPONSE 2:  The department appreciates Mr. Grover's comment and the answer to the immediate question is "yes," someone may rent both the in-studio facility and any related equipment. Based on the comment, the department has amended the definition upon adoption to separate optional equipment rental from the studio facility rental.



COMMENT 3: Mr. Gabriel made several comments which can be summarized as concerns about how MEDIAA and the department's proposed rules do not go far enough to define: (1) what constitutes a Montana equipment rental vendor in New Rule II(6); and (2) the degree of permanency of a vendor's place of business in Montana so that a production or post production company's equipment rental expenses legitimately qualify for media production or media postproduction tax credits.

Mr. Gabriel provided references to the state of Georgia's administrative regulations which define equipment rental vendor practices under Georgia's equivalent to MEDIAA and anecdotal examples of circumventing tax credit processes he perceives will present themselves in Montana without additional regulation.


Similarly, Mr. Grover questions how do you define "principal place of business in Montana?"


RESPONSE 3A Montana equipment rental vendor is one that has a "permanent place of business in Montana," as defined under New Rule I(11), such as a physical location where inventory is located, and the department has provided examples in the definition (e.g., office, factory, store, etc.) as guidance. 

As to the degree of permanency of a vendor in Montana, MEDIAA intends to foster business activity in the state and does not forbid out-of-state businesses from undertaking business in Montana or deny opportunities, which is why New Rule II(6)(a) only requires that a business have a permanent place of business in the state without any time requirement.

Regarding Mr. Gabriel's information about the state of Georgia's vendor practices, the department appreciates Mr. Gabriel's concerns, but cannot address the efficacy of another state's administrative regulations or adopt such additional regulation without statutory authority.

The department has identified the possibility that out-of-state expenses, such as those for rental equipment, may be submitted in a credit calculation, and the department has developed audit procedures to identify these expenditures.  Any production expenditure reported by a production company will require the provider of that service or product to report the income and, without the reporting of that income, the department will deny that expense for inclusion in the credit base.

Finally, the department's rules are consistent under MEDIAA which require a  production company to maintain a Montana office, which is further defined under New Rule I(8) as, "the principal place of business of the production company. . . ."  To satisfy the principal place of business requirement, a production company must establish an office in Montana.


COMMENT 4: Mr. Morra expresses concern that the language in New Rule II(1)(b), which excludes compensation that is incurred more than six months from principal photography is too restrictive. He suggests clarifying language is necessary to ensure all Montana compensation on the production is included in the qualified spend.


RESPONSE 4: The department concurs that 15-31-1007(1), MCA, includes expenditures incurred up to six months prior to state certification of the production, and not six months prior to the beginning of principal photography.  The department has made amendments to the rule upon adoption as correction.  However, the department cannot amend the six-month time frame because it is statutory and exceeds the department's rulemaking authority.


COMMENT 5: Mr. Morra questions if loan-out withholding is required even if the loan-out is already registered to do business in the state. He adds that other states require loan-out withholding or loan-out registration and suggests that the providing an option permits the department to track loan-outs providing services in Montana, and it provides the production company flexibility in dealing with talent and crew.


RESPONSE 5Loan-out withholding is required regardless of whether the loan-out company is registered to do business in Montana.  See 15-31-1003(3)(c), MCA (Compensation includes payments to a loan-out company by a production company if the production company withheld and remitted Montana income tax at the rate of 6.9%.).


COMMENT 6: Regarding depreciation calculation of personal property acquired in Montana for a qualified production, Mr. Morra observes production finance offices do not prepare cost reports using tax accounting or tax depreciation for a production and they cannot wait until the annual tax returns are prepared to receive tax return depreciation from the company's tax compliance team.

Mr. Morra further comments that other states allow the full purchase price in the season the purchase takes place, as long as the asset was not sold after the season wrapped. Another possibility would be to use 50 percent of the value in year one, and if the production returns for a second season, recover the remaining 50 percent.


RESPONSE 6The purchase of personal property with a useful life of more than one year could be used in multiple productions, including multiple productions that could qualify for the credit.  In addition, such property could be sold after the production has taken place, effectively reducing the true cost of the property relative to the production.  Allowing the full cost of such property would, therefore, allow a credit for an expenditure that does not relate to the production.  The department finds the lesser of straight-line depreciation or depreciation allowed for tax purposes during the tax year as a reasonable estimation of the costs related to the production.

Regarding the unavailability of tax records during production, since the principal object of MEDIAA is to provide an income tax credit, it is assumed that its calculation must be in relation to generally accepted accounting principles and tax accounting.


COMMENT 7: Mr. Morra comments to the mileage requirements in New Rule II(5), that in other jurisdictions, driver labor and leased vehicles qualify as separate categories. Additionally, for "drop loads" between states (e.g., camera equipment between Montana and California) 50 percent of the shipping cost should qualify as long as Montana is the originating location or the destination. This is how many other states operate.


RESPONSE 7: In order for an expenditure to be allowed in the credit base, the expenditure must have been incurred in Montana.  Driver labor, to the extent the driver is an employee of the production company, is accounted for separately from the cost of leased vehicles.


COMMENT 8: Regarding the equipment rental expenditure requirements provided in New Rule II(6), Mr. Morra questions whether Montana has the TV/Film infrastructure that can support a large-sized production. If not, will the state allow out-of-state production vendors to register for business in Montana (and pay Montana taxes) to provide goods and services to support the incentive? 

Mr. Morra comments that when states allow conduit purchases, it is an effective way to grow the infrastructure and the jobs for the film industry in that state because businesses will start with a pass-through presence, but once industry shows promise, a brick and mortar presence follows.

Mr. Morra also comments that many other states allow 50 percent of a production company's shipping expenditures as long as Montana is the originating location or the destination.


Similar to Mr. Morra's comment, Mr. Grover opines that Montana production and production supply companies will likely have to ship equipment from out of state in order to meet demand. If so, why would the expense incurred by a Montana-based company not qualify?


RESPONSE 8:  An expense incurred in Montana is included in the credit base and an expense that is not incurred in Montana is not included. Rental expenses that are incurred and earned in another state do not qualify for the credit.  See 15-31-1003(11), 15-31-1006(3)(c), 15-31-1007(3)(a), and 15-31-1007(3)(b)(vi), MCA.


COMMENT 9: In New Rule II(6)(g), Mr. Grover questions why does a lodging facility have to be subject to the lodging tax in order for expenses to qualify. Does this mean if a production company rents an apartment or house the rent expense would not qualify?


RESPONSE 9The department has decided not to include this requirement in the proposed rule at this time, and has amended the rule accordingly upon adoption.


COMMENT 10: In New Rule II(6)(g), Mr. Grover questions how are entertainment expenses defined and why do they not qualify as includable expenses.


RESPONSE 10Section 15-31-1003(11), MCA, provides that a production expenditure means "a preproduction or production expenditure incurred in Montana that is directly used for qualified production activity . . . ." Entertainment expenses are defined by the Internal Revenue Service in Publication 463 (for use in 2019 returns) as, " . . . any activity generally considered to provide entertainment, amusement, or recreation."  Entertainment expenses are not considered direct expenses to the production.


COMMENT 11: Regarding the qualification of preproduction expenses described in New Rule II(7), Mr. Grover questions why are writers and producers excluded. Who does qualify?


RESPONSE 11:  Compensation for writers and producers within six months of the Department of Commerce's production certification is allowable preproduction expenses provided the compensation is earned in Montana and all income tax and withholding laws are followed. The department has amended the rule upon adoption.


COMMENT 12: Mr. Grover questions the general intent and purpose of New Rule II(11) which describes the proposed federal adjusted income requirement when calculating the Montana net income of the production company that files a claim for the media production tax credit.

            Mr. Grover contends that most out-of-state production companies will not have any revenue in Montana, even if they form a Montana-based production company to produce a project. Revenue will not be recognized until the project is sold, and that sale will most likely be by the out of state parent company.

However, a production company that is truly based in Montana is going to have revenue from a variety of sources, and if that company has to add back the expenses that also qualify for the tax credit then they are going to be at a tax-disadvantage to the production company which is only established in Montana for the purpose of a single production. Further, if any company has to add back the expenses that are allowable for the tax credit the state is not truly offering a competitive tax incentive – the state is simply giving a company the option of deducting the production expenses or claiming a tax credit. 

Mr. Grover does not believe other state film incentives have this provision.


Similar to Mr. Grover's comment, Mr. Staggs opines that the tax rules to avoid "double dipping" only affect Montana companies and put local film companies at a disadvantage.


RESPONSE 12:  Section 15-31-1007(8), MCA, does not allow for both a credit and a deduction for an expense incurred as it states, "The credit allowed under this section may not be claimed by a taxpayer if the taxpayer has included the amount of the production expenditure or compensation on which the amount of the credit was computed as a deduction under 15-30-2131 or 15-31-114 [MCA]."  Thus, if a credit has been taken on qualified expenses, then these expenses must be added back on the return.


COMMENT 13In response to New Rule II(12), Mr. Staggs comments that the department's rules should disclose, up front, any sort of add backs or state tax structure elements like that which would potentially affect the net amount of the tax credit received by an applicant.


RESPONSE 13:  Upon submitting the independent CPA report and all of the applicable and required information, the department intends to disclose an estimate of the credit. However, a definitive credit amount will only be determined when the tax return for that year is filed by the production company.  In addition, the department has sought to clarify the necessary elements in the rule and address ambiguous or confusing areas of the law.


COMMENT 14:   In New Rule IV, Mr. Grover questions why the department proposes to allow combining "non-qualifying productions." Mr. Grover contends that either a production qualifies, or it does not, and suggests expanding the definition of "non-qualifying," because the rule is intended to apply to only those projects which do not meet the minimum spend requirements and other projects can also be

non-qualifying based on the type of production, sexual content, etc.


RESPONSE 14:  New Rule IV provides an opportunity for multiple small productions that are undertaken by the same production company to receive the media credit.  This does not apply to non-qualifying productions due to type of production, sexual content, etc., but applies to those productions that do not meet the minimum threshold requirements to meet the required base investment.


COMMENT 15Mr. Grover commented to an inadvertent omission that the department made in New Rule V(2), where the text should provide "When an employee is not paid an hourly wage, the postproduction company must provide an hourly cost of the employee compensation based on a regular work week."


RESPONSE 15: The department thanks Mr. Grover for the comment. As Mr. Baerlocher, on behalf of the department, discussed during the May 8 administrative rules hearing, the department also discovered this inadvertent omission after publication of the proposal rules notice and has amended the rule section upon adoption.


COMMENT 16: Mr. Morra comments that Paramount Network believes it is vital for the sustainability of the MEDIAA program to include a mechanism whereby the Department of Commerce or the Department of Revenue can specifically earmark incentive funds to a specific production upon review of the initial application submitted by the production.

Mr. Morra continues that as currently structured, only after the Department of Revenue reviews actual spend of the production does the production receive the allocated credits. Throughout most of the United States, and internationally, after submitting an initial application, film offices are empowered to set aside or allocate a portion of the credit fund pool to a production based on an estimated budget for the television show or movie. Then, after the Department of Revenue reviews the final production spend, a final certificate is issued with an exact amount of the credits earned. This provides clarity and certainty to the production company that they know at the outset of the initial application, that credit funds will be available to that production.


RESPONSE 16:  The production and postproduction credits are an annual election where various requirements must be met and reviewed annually in order to approve the production. Preapproval or the reserving of a credit for a production without reviewing the current status of a production would create a reliance on a credit that may not, ultimately, exist.

Furthermore, earmarking the credit for productions is problematic given the $10 million cap.  Earmarking the credit for productions that do not ultimately film in Montana could prevent other productions from receiving the credit who would have filmed in the state.  In addition, earmarking funds for certain productions could be perceived as providing preferential treatment to certain productions.


COMMENT 17: Mr. Staggs comments that the application and tax credit determination process should be more straightforward and definite. In his words, ". . . [i]f you spend this much, you should receive this much in return . . . . but you have to go through the process and the Department of Revenue will tell you that number." Mr. Staggs juxtaposes that statement with the question ". . . . [o]r is it a mystery until the end, and they fill out all the paperwork and then get the tax credit?"


RESPONSE 17The department cannot make any analysis or determination of a production company's income and expenses that it purports to earn or incur until the necessary amount of financial information applicable to the credit is received by the department. Without that financial information and a complete application, an exact credit cannot be determined.


COMMENT 18: Regarding New Rule VII(5)(c)(ii), Mr. Cronin asked whether the department is going to provide the production company applying for the tax credit with a chart of accounts or how it is [the department] would like to receive the information. Presumably, that information is not necessarily formatted the same way that the production company would organize their accounting and it would be very important for a production company to receive a list of these identification numbers very early on as the company keeps track of its costs--especially for the notations for college, underserved, etc.


RESPONSE 18:  The department has developed a reporting format to eliminate confusion and expedite the approval process that the production companies can use to assist them in organizing their expenses.


COMMENT 19: Mr. Grover comments that the language in New Rule X appears to limit the amount of credits that can be issued/reserved; however, it was his understanding when the legislation passed that the tax credit limit applied to the amount of tax credits that could be "used" in any given tax year, not the amount that could be issued. 


RESPONSE 19The reservation, at the time the application is submitted to the department, is used to apply the first-come first-served provision of the statute prior to the validation of the credit.  The department agrees that the limit is on the amount of credit used in any given calendar year which is why valid credit in excess of the overall limit will be automatically carried forward to the next calendar year.


COMMENT 20Ms. Rakela made comments that request the department change language in 15-31-1003(11), MCA, that describes airfare requirements as a component of what defines a production expenditure; and also requests the department change the  description of underserved in 15-31-1003(19), MCA.


RESPONSE 20: The changes that Ms. Rakela suggests exceed the department's rulemaking authority; the department cannot change statutes and all statutory authority is a reserved function under the Montana Constitution of the Legislative branch.



/s/ Todd Olson                                              /s/ Gene Walborn                                        

Todd Olson                                                   Gene Walborn

Rule Reviewer                                              Director of Revenue


Certified to the Secretary of State August 18, 2020.

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