Jan 10, 2022

Auditors claim Disney took millions in extra tax credits right before exiting Blue Sky Studios

Last year, as Blue Sky was preparing to shut for good, Connecticut auditors accused it of receiving almost $50 million in excess state tax credits between 2017 and 2019 (state fiscal years). They now say the Greenwich-based studio continued to receive more money than it should have for another two years.

In both 2020 and 2021, Blue Sky was granted a $32M tax credit payment, The Connecticut Mirror reports. According to the state auditors, the Disney-owned studio should have been given no more than $15M per year. By this logic, they told the Mirror, it received $34M too much in the past two years (a period which has yet to be audited), lifting Blue Sky's excess credit toll to $83M.

What's more, the 2021 credit was paid out less than two weeks before Disney announced it would close Blue Sky in February of that year, citing “the current economic realities.” The closure cost 469 people their jobs.

The auditors' conclusions rest on the argument that Blue Sky was applying for - and getting - the wrong credit. Since 2017, it had been receiving the Film and Digital Media Production Tax Credit, which covers up to 30% of qualified production expenses or costs incurred in Connecticut, with no upper limit. The credit isn't tied to specific projects, or metrics like number of jobs created and retained. (Blue Sky was owned by Fox until 2019.)

But the state has another incentive, the Digital Animation Production Tax Credit, which is capped at $15M annually. The auditors believe Blue Sky should have been applying for this instead - as indeed it had until 2016. So everything it got over $15M a year was in excess.

“Since the General Assembly established a separate program for digital animation companies,” notes an auditors' report from last year, “it does not appear that it intended for digital animation companies to be eligible for film production tax credits.” Blue Sky remains the only company ever to receive money under the state's Digital Animation Production Tax Credit.

State law prohibits companies receiving credits from relocating out of the state within ten years, under penalty of repayment and a fine. But Blue Sky didn't relocate: it simply shut in April 2021.

Blue Sky produced the Ice Age and Rio franchises, as well as films like Ferdinand and The Peanuts Movie. It was acquired by Disney as part of the 21st Century Fox purchase in 2019.

Disney did not respond to The Connecticut Mirror's email requests for comment.