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January 5, 2015
January Ushers In Sweeping State Tax Changes
by Maria Koklanaris

Full Text Published by Tax Analysts®

News Analysis

A new year is a time of change, and this one ushers in significant developments in state and local taxation across the country. It also spotlights a study in contrasts for two of the largest states -- one begins the year with an explicit and specific remodel, the other endures a guessing game about what might be in store in a few months, or even in a few weeks.

New York began 2015 with a noteworthy and substantial overhaul to its corporate tax regime. The legislation is in place: Gov. Andrew Cuomo (D) on March 31 approved the overhaul as part of the state's fiscal 2015 budget, earning him an Outstanding Achievement in State Tax Reform award from the Tax Foundation. And Thomas Mattox, commissioner of the Department of Taxation and Finance, said in December that his office has posted frequently asked questions and plans to publish guidance this winter or spring.

It is a big package that includes the adoption of market-based sourcing and single-sales-factor apportionment, and merging the bank tax into the corporate franchise tax. Lowering the corporate tax rate from 7.1 percent to 6.5 percent was also part of the reform, but that new rate takes effect in tax year 2016.

"We're trying to move quickly [on the guidance] but we want it to be fairly tight out of the gate," Mattox said at the New York University Institute on State and Local Taxation. He said the department would prefer not to have to go in later and make repairs.

Paul Comeau of Hodgson Russ LLP, founder of that firm's state and local tax practice and a practitioner in New York for four decades, praised the department for working closely with the business community to draft the reforms. He told Tax Analysts that the reforms represent a needed simplification and consolidation of the corporate tax regime.

"Overall, I think it was a good step," Comeau said.

Halfway across the country in Illinois, there is little praise. The state is broke, its pension costs skyrocketing. And as of January 1, it started losing hundreds of millions of dollars in revenue as its temporary tax increases began expiring.

A month after the election of Bruce Rauner (R), who will become governor on January 12, the Illinois General Assembly adjourned without voting on the fate of Illinois's temporary increased tax rates. In place since 2011, those rates of 7 percent for the corporate income tax and a flat 5 percent for the individual income tax now begin to sunset.

What is known: The rates now revert to 4.8 percent for the corporate tax and a flat 3 percent for the individual income tax. But given the state's fiscal crisis, the changes only bring up questions: How long will the lower rates last? And what else will Rauner propose?

"They have billions in unpaid bills," said Joseph Henchman of the Tax Foundation. "And the state doesn't have the cash to pay."

Carol Portman of the Taxpayers' Federation of Illinois said the governor-elect isn't tipping his hand. She noted that Rauner released a tax plan during the gubernatorial campaign that called for allowing the tax increases to expire and expanding the sales tax to an array of services. But more recently he has said everything is on the table, and Portman added that he is not likely to clarify that for more than another month. Rauner's budget proposal is scheduled for February 18.

"I suppose [Rauner] could immediately bring in the legislature and retroactively raise [the tax rates] back up," Portman said in an interview with Tax Analysts. "But that would surprise me. What I would expect is nothing right away, then in mid-February we'll hear what the plans are."

Illinois's "Amazon" law also took effect January 1. Gov. Pat Quinn (D) on August 26 signed SB 352, which requires some remote sellers to collect sales taxes. SB 352 establishes that a retailer that contracts with an in-state person to refer customers through the person's website or hand-delivered promotional material is considered to have nexus with the state.

New York and Illinois stand out for their size, and the historic --although highly disparate -- nature of what they are undertaking. But 2015 will mean new developments for taxpayers in many other states, and the District of Columbia, as well.


Mid-Atlantic

"This was big reform" in the District of Columbia, where officials enacted the first major tax cut package in 15 years, Henchman said. "Besides the surprise factor, it also showed that it's not impossible to expand the sales tax to select services."

As part of the package, the District this year switches to single-sales-factor apportionment and market-based sourcing. It also phases in lower business tax rates, lowers individual income tax rates for low- and middle-income residents, exempts investment income from the unincorporated business tax, and expands the sales tax to a variety of services.

Pennsylvania in 2015 continues with a plan, provided for in HB 2188 , to amend the community-based services tax credit program so that passthrough entities would be allowed to transfer "all or part of the tax credit to a shareholder, member or partner proportional to the distributive income of the shareholder, member or partner." HB 2188 also suspends 13 tax credit programs through 2016.

Virginia residents are set to pay higher gas taxes in 2015. In 2013 lawmakers passed HB 2313 , a law that raises gas taxes from 3.5 percent of a wholesale gallon to 5.1 percent. According to the legislation, the gas tax increase would have been averted if Congress passed the federal Marketplace Fairness Act in 2014. But it did not.


South

In Kentucky, gas taxes are set to go the other way this year, decreasing from 25.5 cents per gallon to 21.2 cents per gallon. The decrease is based on the wholesale price of fuel and did not require legislation. But that may be short-lived, as Kentucky Rep. Lynn Bechler (R) told Tax Analysts in December that he plans to introduce legislation this year that would require the legislature to approve changes in the gas tax.

In Mississippi, January 1 was the first day of the new state law addressing the controversial Mississippi Supreme Court decision in Equifax Inc. v. Dep't of Revenue . On April 10 Gov. Phil Bryant (R) signed into law HB 799.

In Equifax, the taxpayer used the state's statutory apportionment formula when determining its state income tax liabilities, which resulted in no taxes owed. After an audit, the Department of Revenue determined that that was not an accurate reflection of Equifax's business within the state, and applied an alternative apportionment method sourcing the company's services to Mississippians.

The court upheld the alternative apportionment used by the DOR, saying that the taxpayer had the burden of proving that the department's alternative method was incorrect, and also that it was arbitrary and capricious.

But HB 799 places the burden on the party seeking to use alternative methods. The party has to meet the preponderance of evidence standard, and the apportionment method must be the most reasonable method available.

Practitioners have also applauded the bill's phased-in reduction in interest on income tax penalties, from 1 percent to 0.5 percent, and another provision that limits interest to the unpaid assessment amount, rather than the entire tax liability.

North Carolina continues cutting taxes in 2015. The North Carolina General Assembly on May 29 sent Gov. Pat McCrory (R) a wide-ranging tax bill (HB 1050) that includes a controversial provision to revoke municipalities' authority to tax businesses beginning January 1, and the governor signed it later the same day.

HB 1050 also includes a provision to replace the state's net economic loss deduction with a deduction for state net losses that would be more closely aligned with the federal net operating loss, according to its fiscal note.


New England

In Rhode Island, Tax Administrator David Sullivan on November 25 announced draft regulations for what he described as "the most sweeping changes to the structure of Rhode Island's corporate income tax since 1947" -- the state's implementation of combined reporting, single-sales-factor apportionment, and market-based sourcing.

The changes to the state's corporate tax regime, which take effect for tax year 2015 and beyond, stem from H 7133, the budget bill signed June 19 by Gov. Lincoln Chafee (D). The bill also lowered Rhode Island's corporate tax rate from 9 percent to 7 percent, repealed the franchise tax, and raised the threshold for the estate tax to $1.5 million.

Connecticut has a new law affecting almost every element of its tax regime. HB 5466 generally requires nonresidents to pay Connecticut income tax on gains or losses from the sale or disposition of an interest in a partnership, limited liability company, or subchapter S corporation that owns specific real property in the state. It also modifies how nonresidents' business income is apportioned to Connecticut for income tax purposes by changing the way that some sales are sourced to the state, and changes the starting point for calculating the estate tax for those who die on or after January 1, 2015.

It moves up the deadline for remitting monthly sales taxes and filing sales tax returns from the last day to the 20th day of the month following the month covered by the return, and allows the commissioner to require retailers that fail to pay monthly or quarterly sales taxes on time to file returns and pay the taxes weekly.

In Massachusetts, residents get a small break in the personal income tax rate, which dropped from 5.2 percent to 5.15 percent on January 1, 2015. In 2000 voters approved a series of personal income tax cuts that would eventually reduce the rate to 5 percent. However, the legislature in 2002 froze the rate at 5.3 percent, and established a procedure by which the rate could fall automatically in the future based on a formula that takes into account tax revenue growth.

In Maine, lawmakers passed LD 1664, which exempts charitable contributions from the $27,500 income tax deduction limit. The new exemption will be effective in tax year 2015. The measure is expected to cost $12.5 million in the 2015-2017 biennial budget.


Midwest and West

In Indiana, a portion of SB 1 will go into effect during the latter half of 2015. This portion gives local units of government three options in reducing the business personal property tax charged on equipment and other machinery. The first is a super abatement for up to 20 years on individual business projects. The second option exempts new equipment from the tax, and the third eliminates many small businesses from filing.

In Washington, January 1 marks the expiration of high-tech research and development incentives. The state allows both a business and occupation tax credit and a deferral of sales taxes for qualified R&D expenditures, both of which the DOR advised taxpayers to apply for no later than November 1, 2014.

Under HB 500 , Texas will begin allowing a franchise tax credit of up to 25 percent of the value of expenses incurred in the restoration and preservation of historic structures beginning on January 1.

And the new year is meant to bring greater accountability for tax expenditures in California, where SB 1335 requires that any legislation proposing an income tax credit detail the goals of such a credit and provide performance indicators with which to measure its success.

Also contributing to this report: Amy Hamilton, Brian Bardwell, David Sawyer, Eric Yauch, and Jennifer DePaul.

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