A wording change could spell tax relief for more Arlington tech companies

(Updated at 3:50 p.m.) When Arlington Economic Development tried to help a local tech business take advantage of a county tax incentive program some 2.5 years ago, it hit a snag.

The Commissioner of Revenue denied the company’s application to be recognized as a “qualified technology business,” per a county report. Under this designation, as part of the county’s “Technology Zone” program, it would have paid half the rate normal rate for the Business, Professional, Occupational License (BPOL) tax.

“Technology Zone” allows qualifying companies in Arlington’s “high-technology business corridors” to pay $0.18 per $100 of gross receipts for 10 years, as opposed to the $0.36 that many companies pay for a business license.

AED says the program is one of its “most effective tools” to recruit and retain tech companies, and a spokeswoman for the division tells ARLnow that 105 businesses have been approved for this designation since its inception in 2014.

After talking with the tax assessor’s office, AED learned the business was denied because it used a third-party organization, known as a Professional Employer Organization, to manage company payroll. It also learned “several” other businesses had been turned away for the same reason.

To qualify for the tax break, businesses must show, and the Virginia Employment Commission must verify, they increased their full-time employees by at least 25% within the 12 months before applying for the program.

“PEOs report a company’s employees and wages to the VEC under the PEO’s federal employer identification number, and the reports indicate that the employees are affiliated with the PEO rather than with the company,” said the staff report to the Arlington County Board. “This leaves the company unable to demonstrate employment growth to the County via its own VEC filing and therefore unable to meet the Technology Zone program’s criteria.”

This affects between four and six companies interested in applying for the program every year, AED spokeswoman Cara O’Donnell said.

Now, AED and the Commissioner of Revenue are asking the County Board to allow businesses that use these services to be eligible. The Board is set to review the request during its meeting on Saturday.

“The language does not align with current business processes and trends in the technology industry, specifically the increasing usage of third-party organizations to manage and process company payroll,” the staff report says, asserting that this is “inconsistent with the original intent” of the ordinance.

The proposed changes would also update the definition of “qualified technology business,” which the county says is “vague and outdated.”

County code currently says that a “qualified technology business” has a “primary function in the creation, design, and/or research and development of technology hardware or software.”

It adds that using computers, telecommunications services or the internet “shall not, in itself, be sufficient to qualify as a qualified technology business.”

But AED says this “does not capture many new business models” and recommend emphasizing proprietary technology instead.

Lastly, businesses would have 24 months, rather than 18, to apply to be “qualified technology businesses” after setting up a business in Arlington.

“The proposed amendments are minor technical changes to the ordinance language, not expansive policy changes,” the staff report says. “Together, these changes would enhance the effectiveness of the Technology Zone incentive as a business attraction and retention tool.”