The WISS SALT Advisor – 2nd Quarter 2009

Articles Within This Newsletter

States Scrambling for Revenue – Unorthodox Tax Schemes, Amnesty Programs and Mandatory Combined Filing are Making Headlines

In these tough economic times, more than two thirds of the states face budget shortfalls. The worst financial year is predicted for states since the end of World War II. It appears that nothing is sacred as legislators search for new revenue and  tax sources.

Lawmakers are seeking unorthodox paths for generating revenue as they struggle to balance their budgets.  In the state of Washington, sales tax was proposed on pornography but was shot down at the committee level. An assemblyman in California proposed legalizing and taxing marijuana which is a major but technically illegal crop in the state. In Nevada, a senator is considering introducing legislation to tax brothels.

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Several States Offering Second Chance to Delinquent Tax Filers in Amnesty Programs

Delinquent tax filers have opportunities in several states over the next few months to file their returns and pay the taxes due at reduced interest and/or penalty rates.

  • The Arizona Department of Revenue is conducting a tax amnesty program from May 1 to June 1, 2009. The program provides an opportunity for taxpayers who reside, work, or do business in Arizona to pay any back taxes owed to the state without penalty or criminal prosecution, and at a reduced interest rate. Amnesty tax returns must be accompanied by the amnesty application form, and must be filed or postmarked and paid in full by June 1st.
  • The Connecticut Department of Revenue Services (DRS) tax amnesty program is from May 1 to June 25, 2009. Returns can be filed for any taxable period ending on or before Nov. 30, 2008, if the DRS did not file a return on the taxpayer's behalf. A previously-filed return that underreported taxes can be amended if the return has not been examined by the DRS. The DRS will waive civil penalties and not seek criminal prosecution against program participants who pay all the taxes and interest due. Interest will be assessed at a reduced rate.
  • New Jersey is conducting a tax amnesty program from May 4 to June 15, 2009. The program will cover taxes due on or after Jan. 1, 2002, and before Feb. 1, 2009. Program participants will not have to pay 50% of the interest that is due on a tax liability outstanding as of May 1, 2009. They will also not be liable for collection costs and civil or criminal penalties.
  • The Virginia Tax Commissioner is authorized to conduct a tax amnesty program for 60 to 75 days at some time between July 1, 2009 and June 30, 2010. Any person, individual, corporation, estate, trust, or partnership required to file a return or to pay any tax administered or collected by the Department of Taxation will be eligible to participate, subject to the requirements in Va. Code Ann. § 58.1-1840.1 , and guidelines established by the Tax Commissioner. The program will cover tax periods beginning before Jan. 1, 2008. Civil and criminal penalties and half of the assessed interest will be waived on returns and taxes covered by the program. Any taxpayer eligible for amnesty who retains any outstanding balance after the close of the program because of the nonpayment, underpayment, non-reporting, or underreporting of any tax liability eligible for relief will be subject to a 20% penalty on the unpaid tax. The penalty is in addition to all other penalties that may be assessed against the taxpayer
  • Other programs. The following states have on-going voluntary disclosure programs under which penalties and/or interest may be abated: California, DC, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maryland, Michigan, Missouri, Montana, Nebraska, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Utah, Vermont, West Virginia, and Wisconsin.

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More States Requiring Mandatory Combined Filing

A more "traditional" increased source of revenue that many legislators are turning to is the requirement for combined state tax returns for unitary affiliated groups.

Two more states have passed legislation requiring the filing of combined tax returns in their states: Massachusetts and Wisconsin. There are many other states with legislation in the works contemplating combined filing requirements including Connecticut, Maryland and Rhode Island. Other states which have recently passed or amended their combined filing requirements are Michigan, New York, Texas, Vermont and West Virginia. These states join Alaska, Arizona, California, Hawaii, Idaho, Illinois, Kansas, Maine, Minnesota, Montana, Nebraska, New Hampshire, North Dakota, and Utah which already maintain statutes requiring combined filing for unitary groups of corporations. Additionally, Indiana, Mississippi, New Mexico, Ohio, Tennessee and Virginia have rules which "allow", "permit" or "may require" combined filing.  Almost half of the States in the nation now have statutes relating to combined filing for unitary groups.

Budget shortfalls in most states have caused a clamor in many states to raise tax revenues, and combined filing for unitary groups of corporations appears to be a quick fix to many legislators.

A "unitary business" is defined as a single economic enterprise made up of either separate parts of a single business entity or of a commonly controlled group of business entities that would be sufficiently interdependent, integrated, and interrelated through their activities. A unitary business would reflect a flow of value and may have centralized management.

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Massachusetts Legislation Requires Unitary Filing

Taxpayers in Massachusetts will encounter new challenges in 2009 as the Unitary Filing requirements enter into effect. The new rules apply to taxpayers that are members of an affiliated group with years beginning on or after January 1, 2009. Massachusetts law accounts for an affiliated group as any organization in which 50% of voting or value is held by another organization.

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Wisconsin Passes Unitary Filing Requirements and Other Provisions

The governor has signed a bill which enacts combined reporting for unitary business groups as well as several other personal and corporate income tax provisions. There are additionally some especially onerous new rules relating to the sourcing of intangible receipts All changes to the law unless specified otherwise are in effect for tax years beginning on or after January 1, 2009.

Each member of a combined group is considered to be doing business in Wisconsin if any member of the group is doing business in Wisconsin and that business relates to the group's combined unitary business.

"Doing business" in Wisconsin has been expanded by definition to include:

  • Regularly selling products or services of any kind to in-state customers that receive the product or service in Wisconsin;
  • Regularly soliciting business in Wisconsin;
  • Performing services outside of Wisconsin for which benefits are received in Wisconsin,
  • Regularly engaging in transactions with in-state customers involving intangible property and resulting in receipts flowing to the taxpayer from within Wisconsin; and

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New York Budget Provides Temporary New York State Personal Income Tax Rate Increase Among Other Changes

Rate Increases:

The new top rate and bracket for all filing statuses for tax years 2009 to 20011 is 8.97 percent of taxable income in excess of $500,000. The new “second highest” rate is 7.85 percent and starts at $200,000 for single and $300,000 for married filing jointly.

Because the new law is retroactive to January 1, 2009, withholding tables for these high-income employees will reflect 12 months of the higher withholding within the remaining months of 2009. Taxpayer’s who make quarterly estimated payments must re-compute their 2008 liability using the new 2009 rates in order to avoid underpayment penalties using the prior year’s liability safe harbor.

Limitation on Itemized Deductions

New York already limits the availability of itemized deductions for certain high income taxpayers. Currently, the maximum percentage of disallowed deductions equals 50 percent for all taxpayers with NYAGI above $525,000. This provision completely eliminates the use of itemized deductions, except for the current 50 percent of charitable contributions, by a taxpayer with more than one million of NYAGI. This part is effective January 1, 2009.

Gain from Sale of Partnerships and Other Entities

The new law provides that gains from the sale of interests in certain partnerships and other entities as NY source income to nonresidents to the extent that the gain is attributable to the entity’s ownership of real property located in NY. A nonresident is required to include a portion of the gain or loss from the sale of his or her interest in an entity if 50 percent or more of the entity’s assets consist of real property located in NY. The entities covered include partnerships, S corporations and non-publicly traded C corporations with 100 or fewer shareholders.

Affiliated Nexus for Sales and Use Tax

The new law provides that a vendor required to collect sales tax includes a remote NY seller of tangible property or services if an affiliated person that is a sales tax vendor uses the same trademarks, service marks or trade names as those used by the remote seller. The law also provides that a remote seller is required to register as a sales tax vendor if an affiliated person engages in activities in the state that inure to the benefit of the seller and help it develop or maintain a market for its goods or services in NY.

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California - Budget Bills Signed, Major Tax Changes Enacted

On February 20, California Governor Arnold Schwarzenegger signed a series of bills to address the state's budget process, make changes to the current budget, and increase revenues by, in part, making changes regarding corporate and personal income tax, sales and use tax, property tax, and the vehicle license fee.

Sales Tax

The General Fund portion of the state sales and use tax rate is temporarily increased from 5% to 6% applicable on and after April 1, 2009. The tax hike ceases to be operative on July 1, 2011. If, however, an amendment to the California Constitution is approved at a statewide election held during the 2009 calendar year that limits the total amount that may be transferred by statute from the Budget Stabilization Account to the General Fund, then the temporary rate increase ceases to be operative on July 1, 2012.

Apportionment and "Doing Business" Provisions Revised; New Credits Enacted

The budget deal reached between the California legislature includes revisions to the corporation franchise and income tax provisions governing nexus and apportionment for multi-state corporations, including

  • Revision of the definition of "doing business,
  • Adoption of a single sales factor apportionment formula,
  • Adoption of the Finnigan rule for purposes of the apportionment formula sales factor,
  • Repeal of the cost-of-performance sourcing rules for purposes of determining where sales proceeds from non-tangible property transactions should be sourced, and
  • Adoption of a statutory definition of "gross receipts" for purposes of the sales factor.
  • A new jobs credit against personal income and corporation franchise and income taxes and
  • A new motion pictures production credit against personal income, corporation franchise and income, and sales and use taxes have been enacted.

Beginning with the 2011 taxable year, sales, other than sales of tangible personal property, will be sourced as follows:

  • sales from services are in California to the extent the purchaser of the service received the benefit of the service in California;
  • sales from intangible property are in California to the extent the property is used in this state; in the case of marketable securities, sales are in California if the customer is in California;
  • sales from the sale, lease, rental, or licensing of real property are in California if the real property is located in California; and
  • sales from the rental, lease, or licensing of tangible personal property are in California if the property is located in California.

New Jobs Credit

Beginning with the 2009 taxable year, employers with 20 or fewer employees at the end of the preceding taxable year may qualify for a nonrefundable new jobs credit against the personal income tax and corporation franchise and income tax for each new qualified employee hired. The credit is equal to $3,000 for each net increase in qualified full-time employees from the previous taxable year. All employees of the trades or businesses that are treated as related are treated as employed by a single taxpayer.

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Colorado Adopts Single-Factor Apportionment Formula

Effective for income tax years beginning on or after January 1, 2009, taxpayers must apportion their business income by a single-factor sales formula. The following items, to the extent that they constitute non-business income, are to be directly allocated to Colorado without apportionments. They are the following:

  • Net rents and royalties from real property located in Colorado to the extent that the property is utilized in state and if the taxpayer's domicile is in Colorado, and is not organized under the laws of or taxable in, the state in which the property is located.
  • Capital gains and losses from sales of real property if the property is located in olorado. Capital gains from tangible personal property must be allocated to Colorado if the property is located there at the time of the sale or if the domicile is in Colorado and the corporation was not subject to tax in the state where the property is located.
  • Interest and dividend income if the corporation's domicile is in Colorado.
  • Patent and copyright royalties if the patent or copyright was utilized by the taxpayer in Colorado, or the patent or copyright was utilized in a state in which the taxpayer is not taxable and the taxpayer's domicile is in Colorado.

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New Jersey’s Financial, Incentive and Assistance Programs Available to Businesses

There are many little-known programs which support the expansion of business enterprises and job creation in New Jersey. Additionally there are programs which support the creation of new technology, and the development of energy efficient products and manufacturing. Most of these programs are financed through the New Jersey Economic Development Authority ("EDA") and the Board of Public Utilities ("BPU"), the .J. Department of Labor & Workforce Development ("NJDLW"), and the New Jersey Division of Taxation ("NJDT").

Assistance is available in several areas including loans, grants and tax credits. This is an area that should not be overlooked especially in the consideration of any capital improvements, hiring of new employees, or development of new technology in the State. Please contact us for additional information or visit the NJ EDA web-site at: http://www.njeda.com/web/default.aspx.

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