Ethanol giant fighting to keep secret the reason Iowa agency thinks it should repay millions in tax credits

Source: By Tyler Jett, Des Moines Register • Posted: Monday, October 10, 2022

  • The Department of Revenue has told Poet and other ethanol companies to return research tax credits, saying their work doesn’t qualify.
  • Poet has appealed the case and is resisting records requests for documents about its fight with the state
  • Advocates for disclosure say it’s important for the public to know how the money is handed out

The Iowa Department of Revenue held a closed-door meeting Monday to decide whether the public can know the details of a fight over taxes between the state and the world’s largest ethanol company.

Revenue Department director Kraig Paulson scheduled the hearing for lawyers representing the company, Poet, who have argued that documents submitted to the Department of Revenue are exempt from the state’s open records laws. The South Dakota-based company submitted the documents to the agency as part of an ongoing appeal of the Department of Revenue’s March 2021 decision that Poet improperly received tax credits.

John Fuller, a spokesperson for the agency, said in an email that Paulson is not allowing the public to attend the hearing so Poet’s lawyers can discuss the documents they say should be private. Department of Revenue officials are operating under the assumption that the public cannot see or hear about the records unless Paulson decides otherwise.

“In light of the expectation of hearing specific arguments about documents POET claims are confidential under Iowa law, the Director found it appropriate that the hearing to make such determination be confidential,” Fuller said in an email.

The Department of Revenue has released similar documents about tax credit appeals cases in the past. A state senator who has requested the Poet documents criticized the department’s decision to close Monday’s hearing, as did an open records advocate who argued the public should know what kind of arguments both sides are making.

“The taxpayers just has to trust that state government has their best interest at heart,” said Randy Evans, executive director of the Iowa Freedom of Information Council. “… The taxpayers will be sputtering over this, I’m sure.”

Common Good Iowa Deputy Director Mike Owen, whose organization studies taxes, said the information and hearing should be open to help inform public opinion on the state’s policies toward company financial incentives. He argued that seeing specific examples of how a business receives tax credits could change people’s minds about whether the government should offer them.

“People should be able to understand the system,” Owen said.

What kinds of research are ethanol companies doing?

The Department of Revenue case revolves around Poet’s receipt of a research activities tax credit, a reimbursement from the state for money that companies spend on experimental research in pursuit of new products. The state provides a credit based on how much a company allocates to conduct the research, including wages, materials, building leases, contracts and a variety of other factors. The credit also is refundable, meaning companies receive payments from the state if the credit is worth more than their tax liabilities.

State law limits the release of information about who benefits from research activities credits. The Department of Revenue didn’t disclose any recipients until 2009, when the Legislature passed a bill requiring the state to list companies receiving credits of at least $500,000 in a single year.

That disclosure revealed that the state’s biggest companies receive the lion’s share of the credit. In the Department of Revenue’s 2021 report, the agency listed 19 companies that received a combined $36.2 million. Despite representing just 5% of the businesses receiving a credit, that group took in four-fifths of the money among corporations. (Another 6,500 people received $12 million in credits on their individual tax returns.)

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However, the reports do not provide a full accounting of how much money the biggest businesses receive. The report does not specify whether the companies receive refunds or simply discounts on their annual tax bills. Some companies also receive credits for multiple entities. If some of those entities receive a credit of less than $500,000 in a year, the Department of Revenue does not disclose that transaction, masking some businesses’ total benefits.

The world’s largest ethanol producer, Poet operates 12 plants in Iowa, according to the Renewable Fuels Association. The trade group estimated last October that the company accounted for 15% of U.S. ethanol production capacity.

The company has received research credits in excess of $500,000 under eight Poet different entities since 2016. Based on disclosures listed in Department of Revenue reports, the company’s various entities have received a total of at least $16.8 million in credits from 2016 to 2021.

Poet also appears to be an industry leader in pursuing the credits. A Des Moines Register review of Department of Revenue reports from 2009 through 2015 found no ethanol companies listed during that period, indicating none had received more than $500,000. Then, in 2016, Poet and Mason City-based Golden Grain Energy appeared on the report, and the list expanded in the years that followed.

As the companies’ names began to appear, state Sen. Joe Bolkcom, D-Iowa City, who had long been critical of the tax credit, became dubious that many actually were researching new products.

“What’s the secret sauce?” said Bolkcom, who sponsored the bill that required the state to disclose all recipients getting more than $500,000. “It’s chemistry. We’ve figured out how to (make ethanol) long ago.”

Department of Revenue demanded money back

Some inside the Department of Revenue also raised doubts. The agency has told some ethanol companies to return money they received in the form of credits on the grounds that the work claimed as research did not qualify. At least five companies ― The Andersons, Elite Octane, Golden Grain Energy, Innovative Ag Services Co. and Poet — have appealed the agency’s decision.

In the case against Golden Grain Energy, according to documents the Department of Revenue released to the Register, an agency examiner determined that the company should not have received an $818,000 credit in 2017. According to the examiner, the company claimed the credit after switching the type of yeast it bought from a supplier. The company’s chief operating officer made the change after the manager at another ethanol plant recommended the product.

“While GGE states that it engaged in a process of experimentation, there is little in the record to support this assertion,” the examiner, Matthew Wallace, wrote in an April 2020 letter to the company. “GGE did not establish that it had a methodical plan involving a series of trials to test the hypothesis, identify alternatives, and evaluate alternatives.”

An accountant for the company appealed the decision in June 2020. The accountant did not make any specific arguments in the appeal, instead writing that Golden Grain Energy would provide more information in “the near future.” Fuller, the Department of Revenue spokesperson, told the Register that neither the company nor the agency has filed anything in the pending case since then.

Golden Grains Energy CEO Chad Kuhlers did not respond to an email seeking comment .

Poet’s legal case shrouded in secrecy

In Poet’s appeal, it’s not clear how much money is at stake. The Department of Revenue told the company that it should not have received a credit for the entity DSM Project Liberty, a part of the business that unsuccessfully tried to turn plant residue, like corn cobs and husks, into a fuel called cellulosic ethanol.

According to agency reports, DSM Project Liberty received at least three credits for at least $2.6 million in 2017 and 2018. The Department of Revenue has not stated publicly why the agency believes the work didn’t qualify for the credit.

Last year, Bolkcom filed a records request for any documents in Poet’s appeal. Company attorneys objected, filing a request in July 2021 to delete identifying details from the documents before their public release. The Register also filed a request for the documents in the case last year.

According to the Department of Revenue, Poet’s lawyers have asked the agency to do more than just black out a couple sections in the documents.

“Poet argues that the entire appeal is confidential under Iowa law,” Fuller said.

It’s not clear what arguments Poet’s lawyers have made. Paulson, the Department of Revenue director, wrote in his notice setting Monday’s hearing that the company cited a code section that says the state will not disclose “invasions of privacy” or “trade secrets.” However, the agency has fulfilled similar records requests — such as in the Golden Grains Energy case — while redacting information it claims to be company trade secrets.

Fuller said Poet’s brief arguing to block records requests is about 600 pages long. He told the Register that Department of Revenue lawyers would need 100 hours to review the document before releasing it at a cost of $3,000 to the newspaper.

Fuller said the agency would not provide parts of the brief that only concentrate on legal arguments, which might not require such a lengthy review. Poet spokesperson Erin Smith, meanwhile, declined to comment when the Register asked what arguments the company’s lawyers have made.

When Bolkcom learned around the beginning of September about the hearing on Poet’s motion to block the records request, he said he asked the Department of Revenue if he could speak at the meeting. After he said the agency denied his request, Bolkcom asked if he could attend the hearing. The agency denied that request, too.

A section of Iowa administrative code about Department of Revenue appeals states that evidentiary hearings should be open to the public and recorded. But Fuller said the code doesn’t apply to Monday’s hearing because Poet’s attorneys won’t offer evidence about the tax credit appeal itself — just whether the public can see the records.

Fuller said the gathering is a procedural hearing governed by another section of Iowa code. The particular section he pointed to does not say whether hearings should be open.

Fuller told the Register that the agency’s attorneys generally believe appeal documents are public records.

“We’re really open,” he said. “It’s the people’s right to see these records.”

But Bolkcom said closing the hearing creates doubt about how strongly the agency will argue. Fuller declined to comment on whether the agency’s attorneys have filed briefs arguing against Poet. And if the agency has filed briefs, its officials have taken the position that those documents are not a public record until at least after Monday’s hearing.

Bolkcom said he wishes he could monitor the case more thoroughly because he believes the outcome will influence many other companies around the state.

“They’re all waiting on Poet — to see if Poet can make this a secret operation,” he said.

Tyler Jett covers jobs and the economy for the Des Moines Register. Reach him at tjett@registermedia.com, 515-284-8215, or on Twitter at @LetsJett.

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