The 38 Studios controversy: Of software sales and film credits

Curt Schilling's 38 Studios and his deal with the Rhode Island  Economic Development Corporation are in the news amid questions about whether the fledgling software company is in financial trouble.

One option the company is reportedly seeking is taking advantage of the state's tax credit system for movie, television and video game productions.

PolitiFact Rhode Island has examined claims made about the EDC deal and film tax credits in the past.  In light of the debate, we thought it might be useful to remind readers what we found.

In August 2010, EDC Executive Director Keith Stokes, defending the initial decision to guarantee $75 million in loans to 38 Studios, told Channel 10 that "One of the things we found very clearly and consistently is that [video gaming] is a growth industry." We ruled his statement Barely True (a category we now call Mostly False).

The reason: we found data from the Entertainment Software Association, an industry group, showing that in 2009 the amount spent on games in the United States dropped 10.3 percent compared with the previous year.

Sales had also dipped in 2005.

Now we've gone back and looked at the latest ESA numbers, from 2010, and found that 2009 wasn't a fluke.

The amount spent on computer and video games in 2010 declined by another 3.8 percent, or about $400 million. The number of games purchased also declined, by 7.8 percent. (In contrast, sales of other types of games, such as mobile app games and social network games, showed a big increase.)

Also in 2010, we looked at the film tax credit in light of Senate President Teresa Paiva Weed's statement that the credit, which did not apply to video games at the time, generated $8 for every $1 invested by the state.

The credit is not always used by production companies to avoid Rhode Island taxes. It's often used to raise money.

That's because the credit system allows a production company to get a tax credit equal to 25 percent of its Rhode Island production costs if it spends at least $300,000 on items "directly attributable to activity within the state." If it doesn't need the full tax credit, it distributes part of the remainder to top-line members of the cast and crew. The remainder is usually sold, typically through brokers, to people who may have no connection with the film industry but who owe Rhode Island taxes. The sale raises money to cover production costs, a controversial practice in itself.

When we asked Paiva Weed about the overall economic benefit, she cited a URI study that supported the estimate.

But we found other estimates that were all over the map. To give a couple of extreme examples, a Connecticut analysis said the credits were worth 8 cents on the dollar to the state. A Massachusetts study pegged the number at 16 cents.

As a result, we never issued a Truth-O-Meter ruling on her statement because the truth proved to be too elusive.