Just eight months ago, the state denied Urban Outfitters a lucrative package of tax breaks for a second e-commerce fulfillment center it wanted to build next to its current one near Gap in eastern Lancaster County.
Urban said it was “disappointed” and would “re-evaluate” the project while continuing to work with the Wolf administration and Lancaster County’s legislators.
Now that time of “re-evaluation” is nearing its end, says Urban, a Philadelphia-based global retailer of trendy clothing, accessories, home furnishings and home decor that has been a part of the Gap area for more than 20 years.
But it’s clear that much has already changed — with Urban and the state.
Urban says it now intends to develop a smaller, but still substantial, facility that will handle a wider range of work. Urban also is considering other parts of North America, not just Gap, for the location.
And if Urban picks Gap, applies for the tax breaks and gets rejected by the state Department of Community & Economic Development again, this time there will be new consequences — for the department.
The impacts on DCED are spelled out on page 73 of an amendment to the state tax code signed into law by Gov. Tom Wolf in June.
If the department says no to the new application, it now will have to hold a public hearing within 30 days to explain itself and detail the jobs and investment lost by its decision.
In addition, the new law requires the department to come up with an alternative project in the same municipality that has the same amount of investment and jobs.
“It does seem very unusual. I’m not familiar with anything like that,” said Nathan Benefield, vice president and chief operating officer of the Commonwealth Foundation, a conservative think tank.
A local state lawmaker agreed the provision is odd.
“There’s a strong executive-branch component to me, should Urban be denied. That comes as a little bit of a shock, because it’s never been done this way,” said state Rep. Keith Greiner, an Upper Leacock Republican.
“This seems a little bit out of the ordinary,” he added.
Greiner said he had not been aware of that provision before LNP contacted him.
He was a co-sponsor of the bill, but his focus was the bill’s inheritance tax provision and a provision to let people use a single form to file both a joint estate return and revocable trust return.
And how does the Department of Community and Economic Development feel about the potential consequences?
Press secretary Michael Gerber replied, “We’re just going through them right now. We’re aware of them.”
But they will not change the way the department evaluates applications for the tax breaks, according to Gerber. “No. We’ll review things per the program guidelines,” he said.
Benefield was not a fan of the alternative-project requirement.
The department might have vetoed the proposal for good reasons, he noted.
Benefield added, “A good alternative could just be, they should pay for it without any taxpayer subsidy or tax break, like most businesses in Pennsylvania do.”
In the zone
At issue is a narrow slice of the department’s Keystone Opportunity Zone tax-break program — a sliver that would apply to Urban, should it pursue the Gap site again.
Here’s the situation.
Urban’s existing fulfillment center in Salisbury Township already is in a Keystone zone. The property was designated a KOZ in 2013, saving Urban millions of dollars in state and local taxes since. The fulfillment center opened two years later.
Last year, Urban wanted to expand the zone to the farm next door, where a second fulfillment center would have gone. The farm next door would have become a Keystone Opportunity Expansion Zone, or KOEZ.
The second fulfillment center would have been a twin of the first, which is 1.1 million square feet (almost the size of Park City Center), cost $106 million and employs 1,100, Urban said at the time.
(Employment at the fulfillment center now stands at 1,350.)
The proposed Keystone expansion zone got the blessing of the township, the Pequea Valley School Board and Lancaster County, advancing the proposal to the state.
(Technically, the municipality is the applicant, on behalf of the business.)
But in late December, the Department of Community and Economic Development rejected the request, saying the hefty tax breaks weren’t needed for the site to be developed.
The KOZ and KOEZ designations make a business there exempt for 10 years from certain local taxes (most notably real estate tax) and certain state taxes (most notably corporate net income tax and sales and use tax).
Salisbury Township does not have a real estate tax. But Pequea Valley and the county do.
On the existing fulfillment center, in lieu of paying the property taxes owed, Urban pays the school district and county 110% of the property tax that would be due if the site was not developed.
The arrangement generates a net savings of about $700,000 annually for Urban in property taxes alone, LNP calculated last year.
Urban offered the same approach for the property next door, a 43-acre farm it acquired in 2016 for $6.3 million.
Only 3 counties eligible
Creating Keystone zones is a quirky process. Now that the program is 20 years old, new and expanded zones can only be established when and where a new state law permits.
June’s tax code amendment lays out the latest parameters.
The bill says the Department of Community and Economic Development can accept only KOEZ applications (no KOZ applications), and they can only come from just three of Pennsylvania’s 67 counties.
They are Lancaster County (with three Keystone zones, in Columbia Borough, Lancaster city and Salisbury Township), Clearfield County (two zones) and Cambria County (one zone).
Applications are due by Oct. 1, 2021. DCED has to accept or reject the applications by Dec. 31, 2021.
Urban recently indicated it wanted to take another swing at winning approval of a Keystone zone expansion, prompting Salisbury Township to set a vote for its Aug. 6 meeting. Pequea Valley School District was going to vote July 30 or Aug. 8.
Officials there said the measure was sure to pass.
Les Houck, township secretary-treasurer, said the township supports the zone’s expansion for two reasons.
Viewing the project’s impact on the community, not just the township, Houck said the facility would benefit the school district long-term by adding to its tax base.
“Our main concern has to be the taxpayer,” he said.
But the project would benefit the township as soon as the facility opens, because many of its employees would earn enough to owe the local services tax, said Houck.
(People who work in the township and earn at least $12,000 a year pay $1 a week.)
John Bowden, the school district’s chief of finance and operations, also cited the project’s long-term impact on its tax base.
“We’re definitely looking down the road,” said Bowden. “When (the tax breaks expire), it will be a big jump (in property tax revenue) for us.”
But beyond that, Urban has proven itself to be “tremendous” business partner, he said.
For instance, it sponsors a pre-kindergarten program, shows high school students how its facility uses automation and is involved in other ways.
The Lancaster County Commissioners had yet to schedule their vote on the Keysone zone expansion. A year ago, the commissioners passed the proposal by a 2-1 vote.
Urban steps back
Then last week, Urban tapped the brakes, leading the township and school district to postpone the votes.
Urban said it needs two more months to decide where to put the new facility, explained David Ziel, Urban’s chief development officer.
“We’re not in a position (to make a choice yet)... nor do I think we should take the local community — who’s been a great partner to Urban — through that process unless we’re committed to build (there),” said Ziel.
“I don’t think that’s the right thing to do.”
Ziel said Urban is looking at “multiple regions” in North America; he declined to identify them or say how many.
“We’re looking at everything from incentives to location to cost to labor availability. All those evaluations continue for Urban both within the state of Pennsylvania and (elsewhere),” Ziel said.
Ziel indicated that Urban’s plans have evolved over the past year. Urban now is looking at developing an “omnichannel” building of about 600,000 square feet.
That’s roughly the size of three Walmart supercenters, but barely half the size of Urban’s current fulfillment center in Gap.
The new facility would include a distribution function (sending merchandise to stores and wholesalers) and an e-commerce fulfillment function (sending merchandise to consumers who place orders via the internet).
The number of jobs the project would create — and the cost of the facility — remain to be seen, said Ziel, mostly because Urban has yet to settle on the type of systems the facility would use.
Approve or consequences
It’s not clear whose fingerprints are on the tax code bill’s new consequences for the Department of Community and Economic Development.
Ziel said Urban had “no role” in establishing them.
“The only role that Urban has had is their continued discussions with the (county’s state) delegation, the governor and the DCED, as we always do, to keep them informed about our business and where we’d like to grow,” Ziel said.
State Sen. Scott Martin, whose district includes Salisbury Township, had expressed frustration with the department’s actions a year ago but did not call specifically for the new consequences, said Terry Trego, his chief of staff.
State Rep. David Zimmerman, who represents Salisbury Township in the House, could not be reached for comment. Nor could West Donegal’s state Rep. David Hickernell — another co-sponsor of the bill — or state Sen. Pat Browne of Allentown, a leading voice in shaping the legislation as chairman of the Senate Appropriations Committee.
The bill’s prime sponsor, state Rep. Carl Walker Metzgar of Somerset, referred a reporter’s question to state Rep. Bryan Cutler of Peach Bottom, the House majority leader.
Jake Smeltz, the majority leader’s chief of staff, said Cutler didn’t know who originated the provision, but Cutler supports it as a way to hold DCED accountable for its decisions.