US developer sues Michigan over games tax break

Here’s an interesting angle on the games tax break debate: a US developer is suing two branches of the state of Michigan for denying his application for a gamex tax break (via Detroit Free Press)

Nathaniel McClure, CEO of developer Scientifically Proven, said that he moved his company to Michigan to take advantage of its 42% games tax credit, which was introduced in 2008 (although apparently not a single developer has yet to benefit from it).  However, the State offices overseeing the tax credit (the Michigan Film Office and the Michigan Department of Treasury) refused Scientifically Proven’s application on the basis that it did not have overall control of the IP in the game it is developing, Man vs Wild.  Rather, they argued the IP was controlled by the publisher.  Cue lawsuit from McClure (presumably for both a change in the state’s position as well as for compensations/damages).

So, why is this interesting? 

(1) It goes to show, once again, that control of IP is a critical issue in designing a games tax break.  The tax break draftsmen need to think carefully, and the games industry needs to be clear itself, on who should obtain the games tax break and whether it should depend wholly or partly on control of IP.  (Although clearly ofc that will not be the sole test – there would also have to be a range of financial tests etc).

If and when the UK (or any other European) government decides to back a games tax break again, this point would need to be considered as carefully as the ‘cultural test’.

(2) Do the employees or officers themselves have the right to challenge aspects of the games tax break?  The original Detroit Free Press article suggested that McClure might be suing the state himself, which seems a little odd to me – on what legal basis could he argue for compensation from the state based on its refusal to grant a tax break to his company?  The obvious cause of action is the company against the state.  But, given the propensity of litigants to start as many lawsuits as possible when there is money at stake, I wouldn’t be surprised if we did actually see personal lawsuits over tax breaks (US/Canadian readers, have you seen anything like this?)

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7 comments

  1. Michigan needs to let these people start a business here! they ARE providing permanent jobs, not like all the film companies that hire people in 6 month stints!!

  2. These guys are filming a reality show too. Michigan should consider the attention that will bring to their state as other entertainment companies come too.

  3. The original Detroit Free Press article suggests that McClure could sue the state itself, which seems a bit strange to me on what legal basis can claim compensation from the state based its refusal to grant relief to business tax.

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  4. The law states that once companies have the approval of their applications for tax credit, production costs in Michigan after this point, including the costs of acquiring intellectual property rights, are eligible for "tax incentives.

  5. The obvious reason for this action is an attempt against the state. But because the parties tend to start legal action as much as possible, when you do not have the money at stake.

  6. The state agencies to monitor the tax credit Michigan Film Office and the Michigan Department of Treasury has refused to be scientifically tested the application on the grounds of not having total control in IP is developed.

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