Netflix Poised to Benefit From Change in California Tax Credit

The California Legislature this week agreed to a significant change in the state’s film and TV tax credit, and one company in particular appears poised to benefit: Netflix.

The state issues $330 million in tax credits every year to keep production jobs in California. The credits can be used to offset corporate income tax and sales tax. But some companies either have no California tax liability, or not enough to make full use of the credits.

Gov. Gavin Newsom agreed this year to help those companies out by making the credit “refundable,” so that those companies can get cash back. The Legislature released details of a budget deal on Monday, which indicated that it had approved Newsom’s refundability proposal.

Netflix has previously reported to shareholders that it has more California tax credits than it can use. It has also lobbied for changes in California law to make another business credit, CalCompetes, refundable.

In 2020, Netflix lobbied for a bill, SB 51, that would make that credit partially refundable for large media companies. Sony also lobbied on that bill, according to state records. The bill failed to pass.

The following year, Netflix successfully lobbied for a bill to allow the Governor’s Office of Business and Economic Development (GO-Biz) to issue CalCompetes grants. Those grants are designed to go to companies that do not have enough tax liability to make use of a credit.

In 2022, Netflix received a $26 million grant from the program. Applicants must provide evidence, such as their most recent tax return, showing that they cannot make use of a non-refundable credit, according to Scott Dosick, deputy director of CalCompetes.

Netflix has also indicated in securities filings that it has amassed far more California research and development credits — another business incentive — than it can hope to use. In 2020, the company reported that it did not expect to be able to make use of $250 million in state R&D credits.

The company attributed that to a law that limited the amount of business credits a company could claim to $5 million per year for the following three years. California took that step to help close a pandemic-related budget deficit, and later curtailed it to just two years.

Without disclosing its exact tax liability, Netflix concluded that it probably would not be able to claim its R&D credits, given its forecasts of future taxable income.

As of Dec. 31, 2022, the company reported a “valuation allowance” — representing tax credits it did not expect to be able to use — of $343 million, which included both California R&D credits and foreign credits. The company also reported that it had California tax “carryforwards” — R&D credits that can be applied in future years — of $504 million. The latter figure has been growing in recent years, indicating the company is generating more R&D credits than it can use.

Netflix declined to comment for this story. The Motion Picture Association also declined to comment.

None of the state’s business credits have traditionally been refundable. Chris Hoene, the executive director of the California Budget and Policy Center, said he worried that making the film credit refundable might encourage businesses to lobby for the same benefit for other incentives.

“It’s not a good precedent to be setting,” he said.

Hoene said that if a company does not have tax liability, it’s generally because they are already taking advantage of other credits or deductions in the tax code.

“Adding refundability is basically just a cash giveaway to folks who are already avoiding tax liability,” he said.

Sony has also previously indicated that it would have trouble claiming the film and TV credit because it does not owe California taxes. In 2014, a Sony executive emailed several colleagues to explain that the company would not be able to take advantage of a major expansion of the film credit that year.

“While others may be jubilant, this program is deeply flawed and doesn’t allow SPE to use the program,” wrote the executive, Keith Weaver. “The program provides that the credits are off-set against California income tax liability and because we file taxes on a unitary basis with other Sony group companies and combined we’re in an overall loss position, there is no way to monetize the credits.”

The email was disclosed as part of the 2014 Sony hack. Weaver also stated that the company would seek a “programmatic loophole” to try to monetize the credits.

Both companies have lobbied this year for the extension of the film credit program, which includes the refundability provision, according to lobbying records. Other major studios, including Paramount, Warner Bros. and Comcast/NBCUniversal, have also lobbied for the extension.

The bill will extend the current program, which expires in 2025, to 2030. The funding level will remain at $330 million per year.

Both Netflix and Sony have received California film credits in recent years. Netflix received a $20 million credit for “The Gray Man,” and $35 million for the two upcoming “Rebel Moon” movies, among several other credit awards. Sony received $18 million for “Once Upon a Time… in Hollywood.”

In California, film credits can be claimed up to nine years after they are certified.

Other states with film incentives typically make them either refundable (as in New York) or transferable (as in Georgia). Entertainment companies typically have little or no state tax liability in places like Georgia or Louisiana, meaning they must either be able to sell them to other taxpayers or get a refund in order for the incentive to function.

But companies like Disney and NBCUniversal generate significant California sales tax from their theme park operations, meaning they are able to use non-refundable credits. NBCU received a $20 million CalCompetes credit — not a grant — in 2020.

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