$50M in tax credits probed

Auditors say state agency’s issuance to animation firm came without authorization

The bipartisan state auditors say that a state agency issued $50 million in tax credits without authorization, but the agency disputes that interpretation.

The auditors said Tuesday that the state Department of Economic and Community Development “issued a digital animation company an additional $50,103,700 of film production tax credits even though” current state law “prohibits digital animation companies to also receive the film production tax credit.”

The finding came as part of a broader audit report that covered three fiscal years in 2020, 2021 and 2022.

The issue is that the state DECD provides two separate credits in two categories, causing a dispute among state officials.

As part of the 43-page audit report, DECD responded, “We disagree with this finding. DECD’S interpretation of the legislation in question is that a digital animation company that is applying cannot simultaneously apply under [a separate state statute], but that does not prohibit a company from applying under one, and then subsequently applying for a separate production under the other. DECD will seek to amend the statute to clarify the language.”

The tax credit went to Blue Sky Studios, Inc., a once high-flying, high-profile computer animation company that was based in northwest Greenwich. Created in 1987, the company was known for 13 major films, including “Robots” and “Ice Age.” Acquired later by Disney, the company shut down operations during the coronavirus pandemic in 2021.

Without mentioning Blue Sky by name in the report, the auditors said a digital animation company was “the only recipient of credits under the program” as of

the end of 2016. That same company then received additional credits, even though state law “prohibits any digital animation company from receiving the film production tax credit if it received the digital animation tax credit.”

The credits were highly lucrative, meaning that if a company spent at least $1 million, it could be eligible to receive back 30% of its costs or expenses. The eligible costs included set design and construction, wardrobe, lighting, props, makeup and film processing. Besides movies, the tax credits applied to television commercials, documentaries, video games, infomercials, and music videos.

During six fiscal years from 2016 through 2021, Blue Sky spent nearly $500 million on Connecticut expenses and received more than $140 million in tax credits, according to state statistics.

Film heyday

Blue Sky Studios, which began as a startup, arrived from White Plains, N.Y., after receiving a loan of $8 million in 2008 as an incentive to move to Fairfield County. The deal with DECD called for the company to create 300 jobs, and the actual total reached nearly 500 as nearly $7 million of the loan was forgiven.

Separately, the company received $18 million in Urban and Industrial Site Reinvestment tax credits.

On Tuesday, the auditors said they checked four credits in the urban and industrial category that reached more than $37 million statewide and found that DECD “did not include a provision requiring the companies to repay the credits when they relocated out of state and did not adequately track whether companies that received financial assistance remained in the state during the relocation period.”

DECD disagreed again, saying, “Tax credits are neither ‘state assistance’ nor ‘state financial assistance’ under [state law]. Tax credit programs are administered by application processes. DECD determines an applicant’s eligibility under the appropriate governing statute and may issue certificates of eligibility for the applicant to submit to the Department of Revenue Services for an appropriate credit.”

Starting when the tax credits were approved by the legislature in 2006, the Connecticut tax credit program that was pushed by then-house Speaker James Amann was highly lucrative for film, video and web production, leading to the arrival of movie stars like John Travolta and the filming of an “Indiana Jones” movie in New Haven.

Lawmakers have debated recently whether to end the film tax credit, but no final decisions have been made. Any moves to change the law would need to be done before the regular legislative session ends on May 8.