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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