The WISS SALT Advisor – 3rd Quarter 2009

Articles Within This Newsletter

New Jersey

New York

Other States

Delaware, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Oregon, Vermont, Washington

States Focus on Personal Income Tax Changes

This quarter, states have focused on increasing personal income taxes as they look to reduce large deficits.  Increases in general are focused on the high income individuals (jury is out on the definition of "high income"), with rate changes and decreases in allowances of deductions as income increases.  

Additionally, several more states have come out with amnesty programs; Delaware, Louisiana, Maine, Maryland and Oregon, with favorable terms which should be considered by taxpayers who are not complying in these states.

NEW JERSEY

Governor Corzine Signs Budget Legislation Enacting Higher Taxes

Personal income tax

For tax years beginning on or after January 1, 2009, but before January 1, 2010, the legislation increases the tax rate for taxpayers with taxable income of more than $400,000, as follows: 8% for taxable income of more than $400,000 but less than or equal to $500,000; 10.25% for taxable income of more than $500,000 but less than or equal to $1 million; and 10.75% for taxable income of more than $1 million. The law does not impose any additions to tax or any penalties for insufficient payment of estimated tax that may otherwise be due on salaries, wages and other remuneration received before October 1, 2009, on which these higher rates of tax apply. Nor are employers subject to interest, penalties, or other costs that would otherwise apply for insufficient withholding which results from the new tax rates.

Property tax deduction

For the 2009 tax year the new legislation limits the property tax deduction for high-income taxpayers. Although normally allowed for property taxes paid up to $10,000, the deduction is limited to a maximum of $5,000 for a taxpayer who has gross income over $150,000, but not over $250,000, provided the taxpayer is not a qualifying senior, blind or disabled. For a taxpayer with gross income exceeding $250,000, no deduction is allowed.

Lottery winnings

Winnings from the New Jersey lottery are no longer exempt from personal income tax for tax years beginning after 2008. New Jersey lottery winnings exceeding $10,000 are included in gross income. The Director of Taxation is authorized to set the rate of withholding.

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Governor Signs Economic-Stimulus Plan

On July 27, 2009, New Jersey Gov. Jon S. Corzine signed economic recovery legislation affecting corporation business tax (CBT) and gross (personal) income tax credits and certain sales and utility taxes, imposing a motor vehicle rental tax, and exempting certain property from the non-residential development fee.

Developer's Credit

A new credit is allowed to a developer who makes a capital investment, after enactment and before its submission of required documentation, of at least $50 million in a qualified residential project. The credit is equal to 20% of the capital investment.

Urban Transit Hub Credit 

To be eligible for the CBT and personal income tax credits for qualified capital investment in a business facility in an urban transit, a business has to demonstrate that, at the time of application, the state's financial support of the proposed capital investment would yield a net positive benefit to both the state and the eligible municipality. The capital investment required for the credit is reduced from $75 million to $50 million. The value of all credits approved cannot exceed $1.5 billion. The minimum investment threshold for tenants is decreased and interaction with the owner’s investment threshold is clarified. A business is not eligible for the credit if it receives incentives under the InvestNJ Business Grant Program Act.

Motor Vehicle Rental Tax

A municipality with a population over 100,000, and within which is located a commercial airport that provides a minimum of 10 regularly scheduled commercial airplane flights per day, is authorized to impose up to a 5% tax on the rental fee of motor vehicles, excluding taxes and surcharges. The revenue will fund eligible purposes, mainly consisting of redevelopment plan activities.

Non-Residential Development Fee Exemption

The legislation exempts certain property from the 2.5% development fee imposed by the Statewide Non-Residential Development Fee Act. The measure modifies the Act to exempt property that received site plan approval from a municipality or from the New Jersey Meadowlands Commission before July 1, 2010, from the fee imposed by the Act, provided that a permit for the construction of the building is issued by the local enforcing agency prior to July 1, 2013. The legislation halts application of the fee to projects that have been referred to a planning board by the state or by another public agency prior to July 1, 2010, pending the same permit restrictions.

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City of Newark Payroll Tax

The City of Newark is authorized to impose an Employer Payroll Tax at a rate of 1% of the employer's payroll.  The tax applies to employers who conduct business in the City of Newark and who have a payroll in excess of $2,500 in any calendar quarter.  All employers are required to file an Employer Payroll Tax Return with the City on a quarterly basis.  If the tax is not paid when due the employer is charged interest at a rate of 12%, and penalty at 1/2% per month on the unpaid balance.  No other city in the state imposes a payroll tax.  Although this tax has been around since 1970, contractors or other service providers may not be aware of this requirement. 

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NJ Sales Tax Refunds Related to Bad Debt Write-offs

The methodology for claiming sales tax refunds related to bad debt write-offs changed as of December 1, 2008.  The new rules allow for the credit to be claimed during the period in which the write-off was taken on the financial statements rather than in the period that the tax was originally paid.  Formerly, the proper way to get the credit was through a refund claim on the original return.   

If a deduction is taken for a bad debt and the debt is subsequently collected in whole or part, the sales or use tax on the amount collected must be paid and reported on the return filed for the period in which the collection is made.

When the amount of bad debt exceeds the amount of taxable sales in the period during which the bad debt is written off, a refund claim may be filed within four years from the due date of the return on which the bad debt could first be claimed.

Please note, there are additional requirements if your business is in an enterprise zone.

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NEW YORK

New Individual Tax Rates 

As a result of legislation passed during the spring of 2009, New York State has instituted two new personal income tax brackets for tax years 2009 – 2011 for all filing statuses:  7.85% and 8.97%.  Prior to this legislation, the highest income tax bracket for the personal income tax was 6.85%.

These new personal income tax brackets will come into effect for single and married filing separate taxpayers with taxable income over $200,000; for taxpayers filing as head of household with taxable income over $250,000; and for married filing joint taxpayers with taxable income over $300,000. The net top rate and bracket for all filing statuses for tax year 2009-2011 is 8/97% of taxable income in excess of $500,000.

 The new legislation also limits the New York State itemized deductions for taxpayers with adjusted gross income (AGI) over $1 million.  Charitable contributions are limited to 50% of the amount allowed on Federal Form 1040, Schedule A.  All other federal itemized deductions will be reduced to zero.

Beginning with the second quarter of 2009, all estimated taxes paid for 2009 should be computed using the new 2009 tax rates and itemized deduction rules in order to avoid interest and penalties.

The new legislation also affects S Corporations and Partnerships with nonresident shareholders/partners.  The nonresident partner and nonresident S Corporation shareholder withholding rates have been increased to the top personal income rate of 8.97% on New York source income for the entity.

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Empire Zone Program Updates

Sales and Use Tax: Information Provided on Changes to QEZE Program
The New York Department of Taxation and Finance has issued a sales and use tax  notice and memorandum regarding previously enacted legislation that changes the Empire Zone program. These changes affect business entities claiming Qualified Empire Zone Enterprise (QEZE) sales tax benefits. The changes described do not affect the Empire Zone refunds allowed for tax paid on building materials used in construction, expansion, or rehabilitation of real property located in an Empire Zone.

Issuance of Empire Zone Retention Certificates: Empire State Development (ESD) is required to review all certified Empire Zone business enterprises and apply new criteria for continued certification of businesses wishing to retain Empire Zone benefits. ESD issue an Empire Zone Retention Certificate (EZRC) to businesses meeting the criteria for continued certification. However, a business that receives an EZRC is not automatically eligible for the QEZE sales tax benefits provided for under the Tax Law. A business that receives an EZRC must still meet all eligibility requirements under the Tax Law (including passing the QEZE employment test each year) to qualify for QEZE sales tax benefits.

Repeal of upfront exemption:  Effective September 1, 2009, there will be no upfront exemption from sales tax for any purchases made by a QEZE. As of that date, Form ST-121.6, Qualified Empire Zone Enterprise (QEZE) Exempt Purchase Certificate, is invalid and cannot be used to claim an exemption from tax. Any forms on file with sellers of tangible personal property or services are cancelled and no longer serve to provide an exemption from tax. However, previously issued forms should be retained as part of a seller's records to substantiate any exempt sales made before September 1, 2009.

By September 1, 2009, QEZEs who have issued the exemption document to vendors must notify vendors that the certificate is no longer valid and the QEZE must begin paying full New York state and local sales taxes on its purchases.

New QEZE refund or credit: Effective September 1, 2009, a QEZE must apply for a refund or credit of tax paid on qualifying purchases. A business enterprise must receive an EZRC from ESD before applying for the refund or taking the credit. A business enterprise's eligibility for the refund or credit depends on when the business enterprise is certified by ESD and whether or not it has been issued Form DTF-81, Qualified Empire Zone Enterprise (QEZE) Sales Tax Certification.

How to claim the new refund or credit: The Department is creating a new refund form. This new form must be used for all refund claims. A claim for refund under may be filed only once each sales tax quarter. No interest is payable on any claim for refund filed
QEZEs that are registered for sales tax purposes will also be able to claim the credit allowed under §1119(d) on their periodic sales and use tax returns. Claims for the credit cannot be made on returns filed more often than quarterly. A credit may be claimed with a return due coincident or immediately subsequent to the time the new QEZE refund form is filed. However, no refunds will be paid and no credits will be allowed for at least 270 days after the new law was enacted, which occurred on April 7, 2009. Therefore, no refund applications will be approved or paid prior to January 2, 2010. QEZEs that are also registered for sales and use tax purposes may begin claiming credits for qualifying purchases beginning with the December 1, 2009, through February 28, 2010, reporting period.

Purchases eligible for a QEZE refund or credit: For purchases and uses of property and services to be eligible for a refund or credit, the property or services must be directly and predominantly used or consumed by the QEZE in an Empire Zone in which the QEZE has qualified for benefits. For purposes of the refund or credit, predominantly means 50% or more. A QEZE's use of a motor vehicle or property related to a motor vehicle will be found to occur predominantly in an Empire Zone where the QEZE has qualified for benefits if:

  • the QEZE uses the vehicle at least 50% exclusively in such a zone;
  • at least 50% of the vehicle's use is in activities originating or terminating in such a zone; or
  • at least 50% of its use is a combination of use exclusively in such a zone and in activities originating or terminating in such a zone.

Consumer utility services (other than telephony and telegraphy, telephone and telegraph services, and telephone answering services) must be used or consumed directly and exclusively (i.e., 100%) by a QEZE in an Empire Zone in which the QEZE has qualified for benefits.

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New York City - Substantial Changes in Corporation, UBT and Sales Tax

General Corporation Tax Changes 

Changes include: (1) a single sales factor will be completely phased in beginning with taxable years after 2017, replacing the existing three-factor allocation formula; (2) certain receipts from the services of registered brokers and dealers of securities and commodities must now be sourced using the customer’s mailing address; and (3) beginning in 2009, filing a combined return is now mandatory where there are substantial inter-corporate transactions among the related corporations, regardless of the transfer prices charged in those transactions.

Unincorporated Business Tax Changes

These changes include the phasing in of the single sales factor, the combined filing requirement starting in 2009, and the following: (1) a full credit is now available for liabilities of $3,400 or less, and a partial credit for liabilities between $3,400 and $5,400 (the effect of the credits is that unincorporated businesses with incomes under $100,000 pay no tax, and unincorporated business with incomes under $150,000 pay a reduced tax); and (2) unincorporated businesses are only required to file a UBT return if their gross income is more than $95,000.

Voluntary Disclosure and Compliance Program

Eligible for participation in the program are taxpayers that are not currently under audit by the New York City Department of Finance, are disclosing tax liabilities that the department has not already determined or identified at the time of the disclosure, are not currently a party to a criminal investigation by the state or a one of its political subdivisions, and are not seeking to disclose participation in a tax avoidance transaction that is a federal or state reportable transaction. Upon the execution of an agreement between the taxpayer and the department, the department will waive penalties for failure to pay the tax liability, failure to file a return or report for such tax liability, and failure to pay estimated tax.

Utility Tax Refund Claims

The statute of limitations on utility tax refund claims is now three years from the time the return is filed or two years from the time the tax is paid, whichever of such periods expires later, or if no return was filed, within two years of the time the tax was paid. This provision is applicable to tax periods beginning on or after January 1, 2009.

Sales and Use Tax: Rate Increase, Repeal of Certain Exemptions

Legislation has been enacted that increases the New York City sales tax rate from 4% to 4.5%, effective August 1, 2009. It also increases the tax rate on credit rating and reporting services, and on beauty, barbering, and certain other personal services from 4% to 4.5%, and provides that the taxes on these services can only be imposed through November 30, 2011, unless they are renewed.

In addition, the legislation repeals the New York City sales tax exemption for purchases of clothing items priced at $110 or more (the exemption for clothing and footwear costing under $110 is maintained) and applies the full New York City sales tax to the transmission and distribution of electric and natural gas service, even when the electricity or natural gas service is purchased separately from the transmission and distribution service.

Metropolitan Commuter Transportation Mobility Tax (“MCTMT”)  

The MCTMT is imposed on employers that have payroll expense and on self-employed individuals operating within the Metropolitan Commuter Transportation District in NY (All boroughs of NYC, counties of Rockland, Nassau, Suffolk, Orange, Putnam, Dutchess and Westchester).  It is being treated as a payroll tax; employers need to remit the tax on a quarterly basis along with the other payroll taxes due.  Employers that are public school districts are not subject to the tax until September 1, 2009, but all other employers are subject to the tax as of March 1, 2009.  The following are a few notes related to self-employed individuals who are subject to the tax:

  • The tax rate is an employer paid tax of .34%
  • The tax base includes self-employed individuals
  • Estimated payments must be made and cannot be combined with other personal New York State personal income tax estimated payments
  • The estimates are due beginning on 11/2/2009 since 10/31/09 is a Saturday – normally estimates will be due by the last day of the month following a calendar quarter
  • Liability for 2009 only is computed using 10/12 of self-employment income
  • The first estimate due on 11/2 is a catch-up payment for the first three quarters of the year computed as follows: SE income x 10/12 x 75%
  • A reconciliation return is due by the 30th day of the 4th month after the close of the year  (4/30/2010 for calendar taxpayers) – extensions will be allowed

New Partnership Filing Fee

Beginning on or after January 1, 2009, regular partnerships with New York source gross income of $1 million or more must pay a filing fee, due within 30 days of the last day of the partnership's tax year. Limited liability partnerships, limited liability companies (LLCs) treated as partnerships, and LLCs that are disregarded entities, were already required to pay a filing fee. The amount of the filing fee is based on the New York source gross income of the regular partnership, which is calculated for the tax year immediately preceding the tax year for which the fee is due. No income tax credits may be applied against the filing fee. The amount of the filing fee for a regular partnership is as follows: (1) gross income is exactly $1 million, $500; (2) if gross income is more than $1 million, but not over $5 million, $1,500; (3) if gross income is more than $5 million, but not over $25 million, $3,000; and (4) if gross income is more than $25 million, $4,500.

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Amazon Internet Retail Purchases Case Decided in New York

Based upon a recent court decision in the state, New York began imposing sales tax on online retailers if any New York-based Web site earns referrals from that retailer and the retailer collects at least $10,000 in revenue from these affiliates in state. This new law targeted businesses like Amazon and Overstock who regularly use affiliate referral programs in many states across the country. The result of this bill could be that many online retailers may have to collect sales tax on purchases made to New York residents even if they have no employees or business locations in New York.

In opposition to this new sales tax, Amazon has challenged the position that the existence of an internet affiliate is sufficient to constitute a “physical presence” as required by law. Overstock has filed similar suit in opposition to the New York law, which became effective a year ago. Both cases are still pending.

Now other states are following that lead, aware that New York has discovered a new source of revenue.  Several states are investigating this approach to sales tax with differing results. Similar tax proposals in North Carolina and Rhode Island resulted in Amazon discontinuing its Amazon Associates referral program in those states rather than collect sales tax. Salt Lake City, UT-based Overstock quickly followed by eliminating its affiliate referral programs in those same states, as well as in Hawaii. The result of these large retailers’ actions will negatively impact the revenue of the former affiliates in those states, as well as deflate any projected sales tax revenue these states were expecting to generate with this sales tax law. California Governor Arnold Schwarzenegger ultimately vetoed similar legislation after affiliate programs were being canceled to avoid the sales tax collection requirements in California.

Other states, like Connecticut, are still considering implementing this interpretation. Amazon has contacted the state to voice its opposition and to warn the state of the resulting impact this could have, if the legislation is passed. Maryland, Minnesota and Tennessee considered this legislation but ultimately rejected the proposal.

The unintended result of the imposition of the so-called “Amazon” sales tax collection requirements by online retailers could be a shift in the marketplace focus of the online retailers to the states not inhibiting their marketing efforts through the burdensome collection of sales tax.

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DELAWARE

Amnesty

A voluntary tax compliance initiative that will run from September 1, 2009 to October 30, 2009.  Penalties and interest will be waived for periods before January 1, 2004, if the taxpayer pays the outstanding tax during the initiative period or enters into a payment plan that is paid by June 30, 2010.  Sections related to the 50% limitation on the penalty to timely file, and the 75% limitation on the penalty for fraudulent returns have been removed beginning December 31, 2009

Franchise Tax Increase

A new law was signed by the governor of Delaware on July 2, 2009.  Beginning as of January 1, 2009, the new law will increase the following:

  • The maximum corporate franchise tax from $165,000 to $180,000
  • Corporate franchise tax multiplier from $250 to $350 for each $1 million in capital for taxpayers using the assumed par value method to compute their state franchise tax liability.
  • Beginning on January 1, 2010, the minimum state franchise tax under the assumed par value method will be increased from $75 to $350.

This increase will affect all corporations which are incorporated in Delaware.

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KANSAS

Multiple Taxes: 2009 Legislative Changes

Kansas has enacted numerous changes recently; the following are some of the highlights:

  • Most credits claimed in 2009 and 2010 will be reduced by the lesser of 90% of the current and prior year credits or 90% of the current year liability
  • Carry forwards of the credits are reduced by 10%
  • Corporate income tax surtax rate of 3.35% has been reduced to 3.1% for 2008, 3.05% for 2009 and 2010 and 3% thereafter
  • Sales and Use Tax Refund claim statute of limitations has been reduced from 3 years to 1 year
  • Franchise Tax applies to entities with equity of $1 million or more,  rates in 2009 and 2010 will be lowered with complete elimination of the tax in 2011

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KENTUCKY

Corporate, Personal Income Taxes: Economic Development Credits, Military Tax Exemption Enacted. 

Gov. Steve Beshear signed legislation that creates and amends numerous credits that may be claimed against the Kentucky corporation income tax, the limited liability entity tax (LLET) and the personal income tax. The legislation includes new and amended credits for investment, job training, job retention, employer-paid tuition, first-time new home purchases, small business development, the film industry, and alternative energy facilities. In addition, all military pay received by active duty members of the U.S. Armed Forces, reserve members, and National Guard members, including compensation for state active duty, may be excluded from personal income effective for taxable years beginning on or after January 1, 2010.

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LOUISIANA

Amnesty 

The 2009 Louisiana Tax Amnesty Program, which is applicable to all taxes administered and collected by the Louisiana Department of Revenue (DOR), except for motor fuel taxes, is set to run from September 1, 2009, through October 31, 2009. The program allows taxpayers to settle account balances, overdue audit assessments, and certain tax disputes with no penalties and only half of the interest on what they owe. It applies to resident and nonresident individuals and in-state and multi-state businesses.

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MAINE

Numerous Personal and Corporate Income Tax Changes

Conformity Issues

For tax years beginning on or after January 1, 2008, the legislation updates Maine's date of conformity to the federal IRC to February 17, 2009 (the previous conformity date was February 13, 2008). This generally conforms Maine to the American Recovery and Reinvestment Act of 2009 (P.L. 111-5), except as noted below.

Bonus depreciation  

The legislation extends nonconformity with federal bonus depreciation provisions applicable to property placed in service after 2008, including the bonus depreciation provisions enacted in the federal American Recovery and Reinvestment Act of 2009.

Throw-back and Throw-out Rules

For tax years beginning on or after January 1, 2009, Maine's "throwback" rule is repealed and a "throw-out" rule for sales of tangible personal property is enacted. Maine uses a single-sales factor apportionment formula. Under the new legislation, sales of tangible personal property delivered or shipped to a purchaser in a state in which the taxpayer is not taxable are excluded from both the sales factor's numerator and denominator (regardless of F.O.B. point or other conditions of the sale). In addition, the throwback provisions for other sales are repealed.

Net Operating Losses

For tax years beginning in 2009, 2010, and 2011, the legislation restrictions on the use of net operating losses for both personal income and corporate income taxes.

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MARYLAND

Amnesty 

An amnesty period for delinquent taxpayers has been established from September 1, 2009 through October 30, 2009.  Civil penalties and half the interest related to nonpayment, non-reporting, or underreporting of Maryland state and local corporation income, individual income, withholding, sales and use, or admissions and amusement tax, will be waived.

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MASSACHUSETTS

Sales and Use, Property Taxes: Rate Increases Enacted

The budget bill signed by Massachusetts Gov. Deval Patrick increases the sales and use tax rate, authorizes local taxes on meals, increases maximum authorized local hotel occupancy tax rates, eliminates the sales tax exemption on alcoholic beverages sold in stores, imposes an excise tax on satellite television service, and imposes property tax on certain telecommunications company property.

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OREGON

Gov. Ted Kulongoski has signed legislation that authorizes the Oregon Department of Revenue (DOR) to initiate a tax amnesty program for taxpayers subject to the corporation excise (income) tax, the personal income tax, the inheritance tax, and the mass transit district tax on self-employment. The program will begin on October 1, 2009, and end on November 19, 2009, and applies to tax years, reporting periods, and estates for which the DOR could issue a notice of deficiency. 

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VERMONT

Personal Income Tax Rate Reductions

The personal income tax rate reductions enacted are phased-in over a two-year period. Consequently, the personal income tax rates range from 3.55% to 9.40% for 2009 (3.60% to 9.5% prior to 2009) and from 3.55% to 8.95% beginning with the 2010 tax year.

Research and Development Credit

The new research and development credit is equal to 30% of the federal research credit for eligible research and development expenditures made within Vermont after 2010. Unused credit may be carried forward for up to 10 years.

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WASHINGTON

Dramatic Change in Digital Product Taxation

Effective July 26, 2009, charges for software or application subscriptions and licenses that are accessed online, commonly referred to as application service providers (ASPs) or remote access software, will be classified as retail sales subject to the retail sales tax.  Businesses affected as vendors of web-based subscriptions or applications will have a sales tax collection requirement. Additionally, businesses who are customers who have not been charged the sales tax by the vendor are responsible to report the payments for Use tax.

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