We welcome back guest blogger G. Brint Ryan, Chairman and CEO of Ryan, LLC. Brint wrote a guest blog post for us at the end of 2014 about a case we described then as perhaps the most important procedural case of the year combined with the Loving case. He has continued to litigate concerning the issue of fees for service and the ability of the government to control the fee arrangement between parties. The most recent case involves litigation with the state rather than the IRS but has implications that go beyond just the laws in California. Keith
In an important win for business against government encroachment, a California Superior Court recently invalidated a rule restricting taxpayers from paying performance-based fees for professional services. In this case, Ryan, LLC (“Ryan”) filed suit challenging the legality of an emergency rule promulgated by the California Governor’s Office of Business and Economic Development (“GO-Biz”) in August 2014, which sought to restrict performance-based fee arrangements for companies applying for the California Competes Tax Credit. California Superior Court Judge Timothy M. Frawley ruled in favor of Ryan, stating that the “cost of a consultant’s services is a matter between the taxpayer and the consultant.” He found that the state had failed to show any link between these costs and the economic development goals of the program.
read more...This ruling is a win for businesses and the professionals who assist them in making their growth and investment decisions.
Federal, state, and local governments in the U.S. offer tens of billions of dollars annually in credits and incentives (like the California Competes Program) to businesses to promote job creation and economic development. However, due to the complexity of uncovering and applying for available credits and incentives, half of them go unclaimed each year. Firms like Ryan provide the advice needed to ensure that these incentives aren’t missed by growing businesses that are generating local jobs and economic opportunities.
Of the nearly six million employer firms in this country, companies with fewer than 500 workers accounted for 99.7% of those businesses. In other words, the businesses that make up the very backbone of the U.S. economy are the ones likely to engage a credits and incentives consultant. They are small to medium-sized and unlikely to have the experience, expertise, or bandwidth needed to properly research, identify, and negotiate business incentives. These smaller organizations are the most likely to need external counsel to assist them in unlocking incentives that will help expand their businesses by impacting their bottom line.
Adopting a performance-based fee structure, which pays a consultant only if that consultant successfully procures useful business incentives, is a “win-win” situation, especially for firms who can’t afford to pay these fees upfront. This is precisely why a ban on fee arrangements makes no sense. Restricting taxpayer contracts for professional services would only hamper the appetite and ability of businesses to apply for tax credits—producing a self-defeating result for any economic development program.
Judge Frawley agreed with this argument, writing that banning performance fee arrangements “does nothing to stimulate ‘new employment’ or ‘economic growth,’ and does nothing to encourage businesses to invest in California. The only thing the ban is likely to accomplish is [to] discourage businesses with contingent fee arrangements from participating in the California Competes tax credit program.”
Thus, ironically, losing this lawsuit is actual a “win” for the California economy. Removing this ban puts California back in line with the way other states operate. It opens the market back up for California as a business-friendly state and promotes the California economy.
In addition, the nature of the ban was inherently flawed and lacked a fundamental understanding of how performance-based fees work with regards to incentives. It restricted the fee structure for one particular tax credit. But companies that are considering expansions and relocations typically are not focused on a specific tax credit or incentive in a single state. For example, Ryan works on behalf of its clients to research and pursue any and all potentially available credits and incentives for each potential site so that the client can take all of them into account in determining the return on investment for a project. In general, because the services Ryan provides to its clients are interconnected, span multiple years and locations, and encompass a variety of different tax credits and incentives (national, state, regional, and municipal), the fees it charges cannot be isolated on a “per credit” basis.
Underscoring these arguments is the basic notion of fairness. It is unjust for government to intrude into a company’s business judgments to the point of dictating how a company pays its consultants. Ryan levied a similar blow to Internal Revenue Service (IRS) business regulatory overreach in 2014 in Ridgely v. Lew, which invalidated restrictions prohibiting attorneys, certified public accountants (CPAs), and other practitioners from entering into performance-based fee arrangements for services before the IRS (known as Circular 230 provisions).
This ruling on the California GO-Biz case is a win for businesses as well as economic development in the state of California. Ryan will continue to lead the charge against unfair and illegal government interference that infringes on the rights of taxpayers and inhibits economic growth.
