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| Montana Administrative Register Notice 42-2-929 | No. 16 08/27/2015 | |
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BEFORE THE Department of REVENUE OF THE STATE OF MONTANA
TO: All Concerned Persons
1. On June 25, 2015, the Department of Revenue published MAR Notice No. 42-2-929 pertaining to the public hearing on the proposed amendment of the above-stated rule at page 806 of the 2015 Montana Administrative Register, Issue Number 12.
2. On July 16, 2015, a public hearing was held to consider the proposed amendment. Joe Roberts of the Montana Association of Realtors, and Brian Caldwell, appeared and testified at the hearing. Representative Ed Greef, David O'Connor, Chair of the Big Sky Chamber of Commerce, and Julie Foster, Executive Director of the Ravalli County Economic Development Authority, also submitted written comments.
3. Based upon the comments received and after further review, the department has amended ARM 42.19.1401 as proposed, but with the following changes from the original proposal, new matter underlined, deleted matter interlined: 42.19.1401 DEFINITIONS The following definitions apply to this subchapter: (1) through (3) remain as proposed. (4) "Value-adding economic projects" means projects that, through the employment of knowledge or labor, add value to industrial or technological products, processes, or export services resulting in the creation of new wealth. (a) Value-adding economic projects include projects: (i) that mechanically or chemically transform materials or substances into new products in the manner defined as manufacturing in the North American Industry Classification System Manual prepared by the United States Office of Management and Budget; and (ii) that, through a technological process, transform materials, substances, or information into new products.
(c) Nothing in this section precludes service-based businesses or industries from being located within a targeted economic development district (TEDD), provided the primary purpose of the TEDD is the development of infrastructure to encourage the location and retention of value-added economic projects.
COMMENT 1: Representative Ed Greef commented that he and others in Ravalli County have some concerns that the proposed rule amendments might place restrictions on the county's recent application for a targeted economic development district (TEDD) in the Hamilton area. For example, the new language seems not to include the development and marketing of agricultural products such as cheese manufacturing or poultry processing.
RESPONSE 1: The department appreciates Representative Greef's comments. The proposed amendments are intended to broaden the applicability of the rule, not to narrow it. The department seeks to ensure that value-adding technology projects are considered value-adding economic projects in accordance with the legislature's intent. The proposed amendments are not intended to narrow "secondary value-added products or commodities" for TEDDs. The implementing statute for the rule allows for the processing Representative Greef mentioned.
COMMENT 2: Regarding the department's proposed amendment striking ARM 42.19.1401(1), the department received comments from Brian Caldwell, and David O'Connor, Chair of the Big Sky Chamber of Commerce (chamber). Mr. Caldwell testified about friendly amendments and trying to better understand the intent of the legislature in helping promote the adoption of TEDDs. He commented that the United States North American Industry Classification System (NAICS) manual in (1) is a nationally recognized, fairly robust methodology of understanding business classification and it strikes him as odd that the department would remove a clear way to understand the industries that may qualify. Mr. O'Connor stated that the chamber strongly encourages the department to retain the reference to the NAICS manual as a reference point for value-adding economic development and to provide certainty in terms of recognized value-adding industries. He stated the manual provides common industry definitions, is frequently used for administrative and regulatory purposes, and is the standard used by federal statistical agencies in classifying business establishments for the purpose of collecting, analyzing, and publishing statistical data related to the United States business economy. Mr. O'Connor further stated that the NAICS manual provides an objective standard and predictability. Mr. O'Connor suggested that if the department has concerns regarding the narrowness of the existing language in ARM 42.19.1401(1)(a) and (b), adding a provision to encompass technology and possibly other industries is a potential solution.
RESPONSE 2: The department appreciates Mr. Caldwell and Mr. O'Connor's comments and agrees that the use of the NAICS manual may assist local governments in determining the types of manufacturing projects that qualify as value-adding projects. For this reason the department is amending the rule to again reference the NAICS manual.
COMMENT 3: Regarding the department's proposed language in ARM 42.19.1401(4)(a), the department received comments from Joe Roberts, Montana Association of Realtors (MAR), Mr. Caldwell, Mr. O'Connor, and Julie Foster, Executive Director of the Ravalli County Economic Development Authority (RCEDA). Mr. Roberts testified that the MAR doesn't have a problem with most of the rule, but they do have a problem with (4)(a), which says value-adding economic projects do not include projects undertaken by service-based businesses or industries including, but not limited to, hotels, restaurants, automobile dealerships, and other similar businesses or industries. He commented that the determination of what is and what is not a qualifying TEDD should be made by the local government authorities, as contemplated in statute, and not by department rulemaking. Mr. Roberts further commented that while the rules needed to be updated to reflect 2013 legislative changes, the MAR finds no invitation in that legislation for the department to further define or refine the statutory definitions that are contained therein. Mr. Caldwell commented that the proposed definition relating to service-based industries significantly narrows the types of businesses that could be included in a TEDD. By excluding the service industry the department is not recognizing all of the types of projects or processes that were previously allowable under the industrial, technology, and aerospace tax increment finance districts. He asked why the department is eliminating secondary value-adding industries and removing definitions that made sense to people. Mr. Caldwell further commented that the department has made it less clear what would or would not be excluded. The sentence that ends with "similar businesses or industries" creates an opportunity to describe any intended business or industry as not qualifying, which may be at cross purposes with legislative intent. Mr. O'Connor stated that the chamber requests that the language "and other similar businesses or industries," be deleted because the proposed language is broad and ambiguous and does not provide clear direction in terms of what types of similar businesses or industries would be excluded from value-adding economic projects. This ambiguity results in uncertainty, which is not an economic driver. Ms. Foster requested that the department consider striking (4)(a) and not make the already challenging job of economic development more difficult. She stated that because of the many hurdles that economic development professionals must navigate to achieve a successful project, including those with tax increment finance, this proposed amendment concerns her. Ms. Foster commented that she feels strongly that stating what cannot be done in a district is a problem and will create unintended negative consequences. She further commented that TEDDs may last up to 40 years when they can, maybe, project out three years. Original legislation for tax increment finance is more than 30 years old and did not attempt to list what a district cannot do. Ms. Foster also commented that the phrase "and similar businesses" will create a time-consuming problem for economic developers assisting with a project to create a TEDD who are asked to determine if something is a "similar business." She stated that the NAICS manual for manufacturing says that businesses like bakeries and candy stores can be included in manufacturing if they produce a product that is to be taken off the premises and eaten. Food and beverage and the economics of growing, producing, adding value, marketing, and distributing those products are important job creators and income generators in Ravalli County. Demand is growing. Innovation and collaboration are increasing. Food hubs are collaborative enterprises that aggregate locally-sourced food to meet wholesale, retail, institutional, and even individual demand. Their numbers have increased almost threefold between 2007 and 2014, and their market outreach activities and technical services provide market opportunities for midsized farms and small and beginning farmers. Ms. Foster stated that she agrees that a standalone restaurant, in most cases, doesn't belong in the TEDD. However, there are models that could include a restaurant that will belong in the TEDD. Entrepreneurs are creative, innovative, and nimble. A government agency is never going to guess what the next big thing will be. She asked that the department please not write a list of "no's" when the ideas have not yet been proposed. By saying "no" up front it seems the department will create a situation where the business and local government will be compelled to gain the department's approval in advance. Ms. Foster further stated that without (4)(a) the department may still disagree.
RESPONSE 3: The department appreciates the comments from Mr. Roberts, Mr. Caldwell, Mr. O'Connor, and Ms. Foster. After considering them, the department has amended the rule language to clarify that nothing in the rule will prevent service-based industries from being located within a TEDD, provided the primary intent of the TEDD is the development of infrastructure to encourage the location and retention of value-added projects as they are defined in this rule. The department is, however, retaining the phrase "and similar businesses" in the rule as proposed. Language such as this is frequently used in both statute and rule and is a commonly accepted method of including certain items in a larger class of items without producing a lengthy and exhaustive list.
COMMENT 4: Mr. Roberts commented that the MAR accepts that the department has authority to adopt rules concerning valuation issues in TEDDs; however, the MAR's area of concern is not with valuation but with the general rulemaking. He stated that the rulemaking authority referenced in the notice is very broad in language, is practically without limit, and goes against the grain of the Montana Administrative Procedure Act which has been held in numerous cases to say that an agency must rely on a specific grant of authority from the legislature. Mr. Roberts stated that the legislature specifically placed TEDDs in Title 7, the local government title, and because the primary actors are local governments and the legislature, the role of the department is limited to valuation and establishing the boundaries of the tax increment financing districts. He stated that if the legislature wanted the department to have general supervisory authority over TEDDs, they would have said so. Mr. Roberts referenced court cases that he said speak to the department's rulemaking authority, such as DOR v Fallon County and Gold Creek Cellular v DOR. He stated that the Supreme Court's decision in the Gold Creek case threw out rulemaking from the department found to be arbitrary and in conflict with legislative definitions. Mr. Roberts commented that he thinks that case is substantially equivalent to the question involved in this rulemaking, in that the local government units are in a much better position to make a determination of what qualifies for inclusion within a TEDD, and arbitrarily defining what cannot be included at this level is not really the way the statute was written.
RESPONSE 4: The department appreciates Mr. Roberts' comments. However, the Fallon County case clearly provides the department the authority to develop and adopt rules relating to tax increment financing. Further, the proposed rule, as amended, does not exceed the rulemaking authority established by the legislature and affirmed by the Fallon County court. Because the proposed rule, as amended, does not exceed the scope of the department's legislative authority and because the rule neither expands nor reduces the statutory language relating to TEDDs, the rulemaking does not come under the purview of the Gold Creek decision.
/s/ Laurie Logan /s/ Mike Kadas Laurie Logan Mike Kadas Rule Reviewer Director of Revenue
Certified to the Secretary of State August 17, 2015
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