2013 Trending for Indiana Real Property Taxes

Indiana counties are currently wrapping up their 2013 trending assessments. During a trending year, county and township assessors are required to review arms-length transaction sales within a given time period and trend values up or down accordingly. Once the values have been updated, ratio studies are required to be submitted to the Department of Local Government Finance (DLGF). The DLGF will review the ratio study and approve or deny it. Once the ratio study has been approved and values have been certified counties will start releasing notice of assessments.

Property owners are encouraged to review their assessment notices (Form-11) as soon as they receive them to make sure the assessed value looks appropriate. The property owner has 45 days to file an appeal after the mailing of the first notice of assessment. When a property owner receives their tax bill, it is often too late to appeal the assessed value for that year. Some counties have already mailed their notice of assessments, and the 45-day appeal period is well underway.

We would be happy to review the reassessed value of your commercial property to help you consider whether an appeal should be filed. For assistance, contact your KSM advisor or KSM property tax leader Chad Miller as soon as you receive your Form-11. 

U.S. Senate Passes Marketplace Fairness Act
The U.S. Senate has passed S743, the Marketplace Fairness Act of 2013. S743 generally provides that states can require remote sellers to collect sales tax on goods shipped to consumers in the state. The bill provides an exception for small retailers that have $1 million or less of gross annual receipts in total remote sales in the United States for the preceding calendar year. The bill has been referred to the House Committee on the Judiciary.

Indiana Lawmakers Override Governor's Veto
On June 12, the Indiana House voted 68-23 and the Indiana Senate 34-12 to override Governor Pence's veto of HEA 1546: Tax Administration. The bill, which will now become law, addresses withholding remittance due dates, late penalties for partnerships and corporations, sales tax on gasoline, Jackson and Pulaski County LOIT extension, Vigo County Innkeeper's tax, and other tax related provisions. See HEA 1546 for details.

Indiana Rules Texas Franchise Tax Is a Required Add Back
A telephone company was required to add back Texas Franchise Tax to federal taxable income for the purpose of calculating its Indiana adjusted gross income. Ind. Code § 6-3-1-3.5(b) requires an add back for taxes based on or measured by income in calculating adjusted gross income. As the result of an audit, the Department of Revenue issued a proposed assessment for additional income tax due to the taxpayer's failure to add back the Texas Franchise Tax. In its protest, the taxpayer argued that it was not required to add back the tax because the Texas Franchise Tax is not an income tax. The Department ruled that because the Texas tax starts with and is based on the entity's income as reported on the federal income tax, it is apparent that the tax is based on or measured by income and, therefore, should be added back. See LOF 02-20120562 for details.

Indiana Rules on Software Maintenance Agreements
A taxpayer's purchases of computer software maintenance agreements, which included services, were considered unitary transactions and, therefore, subject to use tax on the total amount of the maintenance agreements. As the result of an audit, the taxpayer was assessed use tax on the total contract price of software maintenance agreements. The taxpayer was charged one price for the contract, a portion of which represented services such as phone support. Although the taxpayer protested the portion of the assessment related to the services, the Department of Revenue determined that the software agreements were unitary transactions that included items of personal property and services, which are furnished under a single order or agreement and for which a total combined charge or price is calculated. Accordingly, the entire contract price of the maintenance agreements, including the amount representing services, was subject to use tax, rather than just the portion relating to the software. See LOF 04-20120689 for details.

Arizona Issues New Guidance on Composite Returns
The Arizona Department of Revenue reiterates that it will accept a composite return of the qualifying nonresident shareholders of an S corporation or of the qualifying nonresident individual partners of a partnership in lieu of each such shareholder or each such partner filing a separate Arizona individual income tax return, provided certain conditions are met. The new ruling also sets forth the limitations and conditions that will apply to the members included in the composite return; describes what the filing of the composite return will consist of; explains how to compute each member's deductions, exemptions and liability; and covers certain other matters relating to composite returns. See Ruling 13-2 for details.

Connecticut Changes Business Entity Tax Filings
The Connecticut Department of Revenue Services has issued a special notice describing legislative changes to the Connecticut business entity tax, making the tax payable biennially rather than annually. The amount of the tax remains $250. For taxable years commencing on or after Jan. 1, 2013, a business entity will be required to file Form OP-424, Business Entity Tax Return, and pay the business entity tax every other year, rather than every year. Entities will file and pay on or before the 15th day of the fourth month following the close of every other taxable year. The notice contains a chart showing due dates applicable to various taxable years. For example, for taxable years Jan. 1, 2013, through Dec. 31, 2013, and Jan. 1, 2014, through Dec. 31, 2014, the due date would be April 15, 2015. See Connecticut Special Notice 2013(1) for details.

Illinois Issues Guidance to Construction Contractors
The Illinois Department of Revenue has issued a general information release stating that construction contractors who physically incorporate tangible personal property into real estate owned by exempt organizations or governmental entities that hold tax exempt "E" numbers can purchase such property tax free by providing their suppliers with the certification requirements stated in Ill. Admin. Code § 130.2075(d). Among the required documentation is a copy of a certification from the contractor stating that the purchase is for conversion into real estate under a contract with an exempt organization or governmental entity, identifying the organization or entity by name and address and stating on what date the contract was entered into. Both the "E" number and the certification must be provided to the supplier by the contractor. See ST 13-0012-GIL for details.

Kentucky Issues Guidance on Taxability of Federal Medical Device Excise Tax and Other Charges; Use Tax Notification Rules
The Kentucky Department of Revenue has issued a new Sales Tax Facts addressing the treatment of the federal medical device excise tax, credit card surcharges and local restaurant taxes for Kentucky sales and use tax purposes. As part of the federal Patient Protection and Affordable Health Care Act, a new 2.3% medical device excise tax has been imposed on manufacturers and importers based on their sales price of certain medical devices beginning Jan. 1, 2013. Manufacturers and importers may pass this tax on to their customers, and if this charge appears as a line item on a retail transaction, the charge will be subject to the Kentucky sales and use tax if the medical device is otherwise taxable in Kentucky. Credit card surcharges, if passed on to the consumer by the retailer, become part of gross receipts and are subject to Kentucky sales and use tax. Ky. Rev. Stat. Ann. § 91A.400 authorizes fourth- and fifth-class cities to impose a tax up to 3% on restaurant receipts for support of local tourist and convention activity. If the restaurant chooses to pass the tax on to the consumer, any collections are part of gross receipts and are subject to sales tax. Also effective July 1, 2013, out-of- state retailers with no legal requirement to collect tax in Kentucky must notify their Kentucky customers that use tax must be reported and paid to the DOR on applicable purchases. These notifications must be posted on the retailer's website, on any electronic confirmation order, and on other applicable invoicing documents or the notification can be provided as a supplemental page or by electronic link. See June 2013 Sales Tax Facts for details.

New York Court Upholds Internet Tax
The Court of Appeals has rejected the constitutional challenges of Amazon.com and Overstock.com to New York Tax Law § 1101(b)(8)(vi) (the "Internet Tax") and held that the Internet Tax does not violate the Commerce Clause or the Due Process Clause of the U.S. Constitution. See Dkt. No. 33 for details.

Texas Rules on Taxability of Broadcast E-mails
The Texas Comptroller of Public Accounts has ruled that broadcast e-mail services and e-mail advertisements provided by a real estate television producer are subject to sales tax as telecommunications services. The taxpayer produces real estate television shows for homebuilders, operates a website through which it offers Internet-based services for the homebuilders, and, for an additional and separate fee, provides "hot sheets" (i.e., weekly e-mail advertisements of the builders' homes and residential communities) and "broadcast e-mails" (i.e., advertisements of upcoming events organized by the homebuilders promoting homes for sale and incentives). Texas taxes telecommunications services, which are the electronic or electrical transmission, conveyance, routing or reception of sounds, signals, data or information utilizing wires, cable, radio waves, microwaves, satellites, fiber optics, or any other method now in existence or that may be devised, including but not limited to long-distance telephone service, and does not include the storage of data or information for subsequent retrieval or the processing, or reception and processing, of data or information intended to change its form or content. In this case, the hot sheet and broadcast e-mail services are taxable telecommunications services because the taxpayer is engaged in electronically transmitting information via e-mail transmissions. The customers are not paying for the placement of advertisements, but rather are paying solely for the electronic transmission of information via e-mail and the taxpayer does nothing more than provide the means for electronically transmitting its customers' advertisements. See Comptroller's Decision 105,515 for details.

For more information, contact Donna Niesen at dniesen@ksmcpa.com. 

The Indiana inheritance tax was recently repealed retroactively for decedents dying on or after Jan. 1, 2013. Even if the decedent’s estate is small enough (generally under $5.25 million for decedents dying in 2013) such that no federal estate tax return is required to be filed, it will still be important to value assets as of the date of death for income tax purposes. That is, the estate’s/heirs’ income tax basis will be the fair market value of the assets as of the date of the decedent’s death. Further, estate (and perhaps trust) income tax returns will still need to be filed.

For more information, contact your KSM advisor.

Property Tax Alert – Indiana

Amended Form 11s issued by Marion County: In December 2012, Marion County issued its Notices of Assessment (Form 11s) to all real property taxpayers. The Form 11 establishes the value for the 2012 property taxes payable in 2013. After the original notices were issued, Marion County reevaluated its calculations, resulting in amended notices for many taxpayers. After the reevaluation, some assessed values have increased as much as $10 million from the original notice received. The amended Form 11s were mailed by the county at the beginning of April, and the deadline to appeal the resulting new assessed value is May 13, 2013.

Additionally, due to the upcoming payment due date of May 10, many counties have begun to mail their property tax bills. Upon receipt of your tax bill, it is recommended that you compare it to the Form 11 you have received to confirm that the correct assessed value was used to compute the tax liability. Additionally, KSM recommends that you confirm that all exemptions are on file (residential) or applicable deductions are taken (commercial) when calculating the tax liability. All taxpayers should also confirm that their property is receiving the appropriate property tax cap.

For any commercial property owner needing assistance with either matter, please feel free to contact KSM’s property tax practice leader Chad Miller or your KSM representative.

Indiana Tax Court Rules on Net Operating Losses (NOL) Computation
The Indiana Tax Court has ruled that a corporation's foreign source dividends are deductible in calculating its Indiana net operating losses, including those available for carryover as a deduction from taxable income in future years. The taxpayer is a Delaware corporation that manufactures construction and mining equipment worldwide, including a manufacturing plant in Lafayette, Ind., and took a foreign source dividend deduction and reported the NOLs on a separate company basis in each of its loss years for Indiana income tax purposes. Indiana law provides that an Indiana NOL equals the federal NOL for a taxable year derived from sources within Indiana and adjusted for specified and required modifications, and a corporation that includes any Foreign Source Dividends (FSD) in its Indiana adjusted gross income for a taxable year is entitled to a deduction from that adjusted gross income. Therefore, the taxpayer's FSDs are deductible in calculating its Indiana NOLs because “adjusted gross income” is a component of the Indiana NOL provisions and the taxpayer's FSD income is included in that adjusted gross income. Further, legislative intent shows that the Indiana FSD provisions are to apply whenever FSD income is included in Indiana adjusted gross income even when calculating Indiana NOLs. See Caterpillar, Inc. v Indiana Department of State Revenue for more information.

Indiana Rules on Taxability of Digital Items
A taxpayer's sales of authentication services, including the provision of a digital certificate to its customers, were not subject to the sales and use tax. The taxpayer is a provider of authentication solutions that allow for businesses and individuals to perform secure electronic commerce and communications over the internet. Among the solutions are the provision of a digital certificate and authentication and resolution services, which are provided on a subscription basis. The Indiana Department of State Revenue determined that the digital certificates were neither specified digital products subject to the sales and use tax, nor were they considered to be computer software because the digital certificates did not represent a set of coded instructions designed to cause a computer or automatic data processing equipment to perform a task. Accordingly, the sales of the authentication services were not subject to tax. See Ruling ST 12-04 for more information.

Multistate Tax Commission Discusses Proposed Compact Amendments
The Multistate Tax Commission has proposed several amendments to Article IV of the Multistate Tax Compact. Recognizing the impact that changes in the economy and state tax policy have had on the relevance of the compact and in an effort to promote increased uniformity among state tax systems, the commission has recommended changes to sections of the compact dealing with the apportionment of business income. The proposed amendments are the product of a multi-year effort on the part of the commission and are focused on five key areas: sales factor sourcing of intangibles, the definition of "sales," factor weighting, the definition of "business income," and distortion relief.

California Moves to Single Sales Factor
An “apportioning trade or business,” which includes a nonresident's business, trade or profession that carries on within and out of California, is now required to apportion business income using the single sales factor. Proposition 39, which added Cal. Rev. & Tax. Cd. § 25128.7 for taxable years beginning on or after Jan. 1, 2013, requires “all business income of an apportioning trade or business shall be apportioned to this state by multiplying the business income by the sales factor.” California Regulation Sections 17951 through 17954 requires such businesses to source such business income in accordance with the provisions of the corporate apportionment rules. This means, according to the Franchise Tax Board, “an apportioning trade or business” regardless of the form of ownership, (e.g., sole proprietorship, partnership, limited liability company, or corporation), that carries on within and out of California is required to apportion the nonresident's business income using the single sales factor. See April Tax News for more information.

Idaho Adjusts NOL Carryback Rules
Effective retroactive to Jan. 1, 2013, the Idaho two-year carryback provisions allowed for unused net operating loss amounts for NOLs for tax years starting on or after Jan. 1, 2013, are applicable only if an amended return carrying the loss back is filed within one year of the end of the tax year of the NOL that results in the carryback. Also, the provisions governing the Idaho 20-year carryforward allowed for such unused NOL amounts no longer require taxpayers to check a separate state election box on the taxpayer's Idaho tax return to take that carryforward. See HB 184 for more information.

Illinois Rules on Rolling Stock Exemption
The Illinois Department of Revenue has released a general information letter stating that diesel exhaust fluid, which is injected into the exhaust gas of diesel motors to reduce emissions, does not qualify for the rolling stock exemption because it does not become a physical component of the qualifying rolling stock and is therefore a consumable that is subject to tax. Under Ill. Admin. Code 86 § 130.340, items such as oil, grease, belts and lights qualify for the rolling stock exemption because they become a physical component part of the qualifying rolling stock, but items such as fuel, paint supplies and cleaners do not qualify because they do not become a component part of such vehicle and therefore do not participate directly in some way with the transportation process. See ST 13-0002-GIL for more information.

Kentucky Imposes Use Tax Notification Requirement on Out-of-State Sellers
Effective July 1, 2013, every retailer making sales of tangible personal property or digital property from outside Kentucky for storage, use or consumption in Kentucky, who is not required to collect Kentucky use tax, must notify the purchaser that he or she is required to report and pay the Kentucky use tax directly to the Department of Revenue on purchases from that retailer unless the purchases are otherwise exempt. The required notification must be readily visible and be included on the retailer's Internet website, retail catalog and on invoices provided to the purchaser. The law specifies the exact language that must be used. Any retailer that made total gross sales of less than $100,000 to Kentucky residents or businesses located in Kentucky and that reasonably expects that its Kentucky sales in the current calendar year will be less than $100,000 is exempt from the notification requirement. See HB 440 for more information.

For more information, contact Donna Niesen at dniesen@ksmcpa.com. 

• Proposed Accounting Standards Update on Discontinued Operations
   
• Update on the FASB Lease Proposal

Proposed Accounting Standards Update on Discontinued Operations

In April 2013, the Financial Accounting Standards Board (FASB) issued a proposed accounting standards update (ASU), Presentation of Financial Statements (Topic 205): Reporting Discontinued Operations, for public comment. The amendments in the proposed update will address a common complaint that too many disposals of assets currently require discontinued operations presentation in the financial statements. Current discontinued operations reporting guidelines can result in financial statements that are not useful to users of the financial statements and can be more difficult to prepare.

Currently, a component of an entity should be classified as a discontinued operation if: 1) it has been disposed of or is held for sale, 2) the operations and cash flows of the component have been or will be eliminated from the ongoing operations of the entity because of the disposal, and 3) the entity will not have significant continuing involvement in the operations of the component after the disposal.

Under the proposed amendments, a component of an entity would only be treated as a discontinued operation if: 1) it has been disposed of or is held for sale, and 2) it is part of a single coordinated plan to dispose of a separate major line of business or separate major geographical area of operations.

Disposals of equity method investments that meet the above definition of a discontinued operation would be eligible for discontinued operations presentation. Also, the requirement that the operations and cash flows of the component have been or will be eliminated from the ongoing operations of the entity because of the disposal, and the entity will not have significant continuing involvement in the operations of the component after the disposal, would be eliminated by the amendments.

The proposed amendments would require additional disclosures about discontinued operations including the major income and expense items, major classes of cash flows, a reconciliation of the major classes of assets and liabilities held for sale that are disclosed in the financial statements to what is presented on the balance sheet, and a reconciliation of the major income and expense items that are disclosed in the notes to the financial statements to the after-tax profit or loss from the discontinued operation on the income statement. The proposed amendments will also require disclosures related to the disposal of an individually material component of an entity that does not qualify for discontinued operations presentation. Also proposed are expanded disclosures about an entity’s continuing involvement with a discontinued operation including the amount of cash inflows and outflows from and to the discontinued operation and disclosures about a discontinued operation in which an entity retains an equity method investment after the disposal.

The effective date of the proposed amendments will be determined after the FASB considers the feedback received. The proposed amendments will be applied prospectively and earlier adoption will be permitted. Comments on this proposed ASU are due by Aug. 30, 2013.

Update on the FASB Lease Proposal  

The FASB has announced that it will release for public comment in May 2013 a re-exposure on the proposed ASU on the financial reporting for leases. The lease proposal will be converged with the International Accounting Standards Board exposure draft that is expected to be released in June 2013.

The lease proposal will require that all leases be recorded on the balance sheet of lessees. On the income statement, expenses would be recognized depending on whether significant consumption of the asset occurs during the lease. Leases where the asset depreciates significantly during the lease term (equipment and vehicles, for example) would be accounted for differently than assets that do not depreciate or increase in value (land and buildings, for example). Leases for assets with significant consumption of the asset would be expensed through amortization of the asset and interest expense on the lease liability. The expense would generally decrease over the term of the lease resulting in front-loaded expenses. For leases of assets without significant consumption of the asset, the lease payments would be expensed on a straight-line basis over the lease term.

The re-exposure of the proposed ASU on leases is expected to be out for comment for a 120-day period. For a full status update on the proposal, refer to the FASB website.

Many Indiana counties have contracted with a third-party vendor to perform business personal property tax audits on their behalf. Since these contracts went into place, Katz, Sapper & Miller (KSM) has seen a significant spike in personal property tax audits. These spikes have been especially large for our clients located in Marion, Hamilton and Allen counties.

A typical business personal property tax audit covers three years and can result in additional tax, penalty and interest. Because these audits are performed on a contingency basis, the auditing firms are paid based on the amount in new taxes assessed and collected. According to the website of one vendor, it has audited 27,685 returns and identified over $1 billion in errors.

Again, this tax alert concerns personal property used in a trade or business only, not property held and used by individuals.

If your business receives a notice of personal property tax audit from a county or third-party auditor, KSM can assist you in managing the audit process and work to minimize a potential assessment. Please feel free to contact your KSM advisor, our property tax leader, Chad Miller, or state and local tax manager, Heather Judy, if you need assistance.

• FASB and IASB Reach Tentative Decisions on Revenue Recognition Proposal
   
• FASB Issues Proposed Guidance on Financial Assets and Liabilities
   
• FASB Issues ASU 2013-05

FASB and IASB Reach Tentative Decisions on Revenue Recognition Proposal

Revenue is a key number for users of financial statements in assessing an entity’s financial performance. As part of the ongoing Financial Accounting Standards Board (FASB) and International Accounting Standards Board’s (IASB) (the Boards) joint projects, they continue to discuss revenue recognition. This has been one of their key projects, and one that has been ongoing for a number of years. The first Discussion Paper on this topic was released in December 2008. The Boards’ main objectives were to develop more consistent requirements, improve comparability, and provide more useful information to users of financial statements.

The Boards have recently reached tentative decisions on the revenue recognition disclosure issues related to the following:

1. Disaggregation of revenue
2. Reconciliation of contract balances
3. Remaining performance obligations
4. Assets recognized from the costs to obtain or fulfill a contract with a customer
5. Onerous performance obligations
6. Qualitative information about performance obligations and significant judgments

The Boards also reached tentative decisions on transition, effective date and early application. The tentative transition guidance would allow an entity to apply the new revenue standard retrospectively with optional enhanced practical expedients. An entity would also be allowed to elect an alternative transition method that would require:

1. Applying the new revenue standard only to contracts that have not been completed under old standards;
2. Recognizing the cumulative effect of initially applying the new standard to the opening balance of retained earnings; and
3. Providing additional disclosures related to the amount by which each financial statement line item is impacted and explanation of the significant changes in reported results under the new standard.

The revenue recognition guidance would be effective for annual periods beginning on or after Jan. 1, 2017. Early application would not be permitted.

The Boards noted that the period of time from the expected issuance of the standard until its effective date is longer than usual due to the unique attributes of the revenue recognition project, including the scope of entities that will be affected and the potentially significant effect that a change in revenue recognition has on other financial statement line items.

The Boards have completed their substantive redeliberations of the 2011 exposure draft. The FASB staff has begun drafting the final revenue recognition standard, with final release expected in the second quarter of 2013. See the FASB website for a complete update on the revenue recognition project.

FASB Issues Proposed Guidance on Financial Assets and Liabilities  

The FASB has issued a proposed Accounting Standards Update (ASU), Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The proposed ASU is part of the joint projects with the IASB to converge the accounting for financial instruments, and to provide a comprehensive measurement framework for classifying and measuring financial instruments.

As described below, the proposed accounting standard would measure financial assets based on how a reporting entity would realize value from them as part of distinct business activities, while the measurement of financial liabilities would be consistent with how the entity expects to settle those liabilities.

Financial assets would be classified into one of three categories:

1. Amortized cost;
2. Fair value through other comprehensive income (OCI); or
3. Fair value through net income.

Equity investments (except those accounted for under the equity method of accounting) would be measured at fair value with changes in fair value recognized in net income. A “practicability exception” to measurement at fair value would be provided for equity investments without fair values that can be readily determined.

Financial liabilities would generally be required to be carried at cost unless: 1) the reporting organization’s business strategy is to transact at fair value, or 2) the obligation results from a short sale.

Public companies would be required to disclose fair values parenthetically on the face of the balance sheet for financial assets and financial liabilities measured at amortized cost, with exceptions for demand deposit liabilities and receivables and payables due in less than a year. Nonpublic entities would not be required to disclose this fair value information parenthetically or in the notes. Comments on the proposal are due by May 15, 2013.

FASB Issues ASU 2013-05 

The FASB has issued Accounting Standards Update (ASU) No. 2013-05, Foreign Currency Matters (Topic 830) Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.

When a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or business within a foreign entity, the parent is required to apply the guidance in Subtopic 830-30 to release any related cumulative translation adjustment into net income. The cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided.

For an equity method investment that is a foreign entity, the partial sale guidance in Section 830-30-40 still applies. As such, a pro rata portion of the cumulative translation adjustment should be released into net income upon a partial sale of such an equity method investment. This treatment does not apply to an equity method investment that is not a foreign entity. In those instances, the cumulative translation adjustment is released into net income only if the partial sale represents a complete or substantially complete liquidation of the foreign entity that contains the equity method investment.

The ASU also provides clarification as to what events comprise a sale of an investment in a foreign entity.

For public entities, the amendments in this ASU are effective prospectively for fiscal years beginning after Dec. 15, 2013. For nonpublic entities the amendments in this ASU are effective prospectively for the first annual period beginning after Dec. 15, 2014, and interim and annual periods thereafter. The amendments should be applied prospectively to derecognition events occurring after the effective date. Prior periods should not be adjusted. Early adoption is permitted.

Personal Property Tax Audits
Many Indiana counties have contracted with a third-party vendor to perform personal property tax audits on their behalf. Since these contracts went into place, Katz, Sapper & Miller has seen a significant spike in personal property tax audits. These spikes have been especially large for our clients located in Marion, Hamilton and Allen counties.

A typical personal property tax audit covers three years and can result in additional tax, penalty and interest. Because these audits are performed on a contingency basis, the auditing firms are paid based on the amount in new taxes assessed and collected. According to the website of one vendor, it has audited 27,685 returns and identified over $1 billion in errors.

If you receive a notice of personal property tax audit from a county or its third-party auditor and would like assistance with the audit, contact Katz, Sapper & Miller's property tax leader, Chad Miller, or state and local tax manager, Heather Judy. We would be happy to assist you through this process.

Proposed Federal Legislation on Sales Tax and Remote Seller Collection Responsibilities
The Marketplace Fairness Act of 2013, which was introduced in the U.S. House of Representatives and the U.S. Senate on Feb. 14, 2013, would allow states the option to require the collection of sales and use taxes owed under state law by remote sellers, rather than rely on consumers to remit use taxes to the state, if the remote seller has gross annual receipts in total remote sales in the United States for the preceding calendar year of more than $1 million. The state would be required to implement minimum simplification requirements. Currently the bill has been referred to the House Committee on the Judiciary (see H.R. 684 and S. 336).

Indiana Rules on Sales Tax Nexus
An out-of-state retail merchant's deliveries of merchandise to its customers in Indiana established nexus with the state; therefore, the retailer was subject to sales tax on the merchandise delivered within the state. A vendor must have substantial nexus with a state in order for it to be subject to state-imposed duties to collect sales and use taxes. A vendor whose only contacts with the taxing state are by mail or common carrier lacks substantial nexus. In this instance, the retailer did not use a common carrier; rather, it delivered merchandise to its customers in Indiana in its own conveyance. Therefore, it created sales tax nexus. For more information, see LOF 04-20120449.

Ohio Issues Guidance on CAT Compliance
The Ohio Department of Taxation reminds calendar quarter taxpayers of recent changes to the application of the annual $1 million exclusion. Previously, a calendar quarter taxpayer would exclude $250,000 on each of the four quarterly returns in the calendar year, and any unused exclusion amount could be carried forward for three calendar quarters. However, for tax periods beginning on Jan. 1, 2013 and thereafter, a taxpayer who pays on a quarterly basis excludes the first $1 million of taxable gross receipts on the first quarter return and carries forward any unused portion of the exclusion amount to subsequent quarters within the same calendar year. Unused amounts from calendar year 2012 may not be carried forward into calendar year 2013. For more information, see Ohio Tax Information Release CAT 2013-01.

New Mexico Rules on Taxability of Subscription Sales of Web-Based Tools
An out-of-state data provider that sells a license to its customers so that they can access data and software online in New Mexico is subject to gross receipts tax. For gross receipts tax purposes, the location of the license is the place where it will be normally used. Each customer can be expected to use the license at the location where the customer's Internet access exists. In the absence of any evidence to the contrary, the location of a license is presumed to be the customer's business location. If the business location is in New Mexico then the location of the license is also in New Mexico. Because the taxpayer is selling a license to use in New Mexico, which is a form of intangible property, the taxpayer is engaging in business in New Mexico and may not deduct the sale of intangible property (license) to government entities or to an educational institution. The taxpayer's receipts from sales of a license to government entities or Code Sec. 501(c)(3) educational organizations in New Mexico are subject to gross receipts tax. However, the taxpayer's receipt from performing consulting and analyst services outside of New Mexico are exempt and it is irrelevant whether the taxpayer's customers are government entities or educational institutions. For more information, see Ruling 401-13-1.

Virginia Rules on Vendor Responsibilities When Accepting Exemption Certificates
The Virginia Department of Revenue determined that a purchase of tangible personal property by an organization paid for directly from the organization's funds is an exempt purchase and acceptance of an exemption certificate in good faith requires the dealer to examine the certificate for compliance. The taxpayer sells tangible personal property to exempt organizations and requests clarification on payment methods of purchasers and when an exemption certificate can be accepted in good faith. The Department noted that a seller must use reasonable care and judgment when selling tangible personal property even when an exemption certificate is on file and that acceptance in good faith requires the dealer to examine the certificate for compliance before a tax-free sale occurs. The Department further noted that once a seller certifies that the purchase qualifies for an exemption from Virginia retail sales and use tax, purchases by an exempt organization that are billed and paid for by the organization's check or credit card are exempt. Va. Code Ann. § 58.1-609.11 provides that a nonprofit organization retains its exemption until the current exemption expires. Additionally, exemptions provided for tangible personal property used or consumed by the government must be accompanied by an official government purchase order or a valid government exemption certificate. Once such a certificate is provided the taxpayer is not required to receive an official purchase order each time an exempt sale is made to a government agency. The Department clarified that if an employee of an exempt organization uses their own funds expecting to be reimbursed by the exempt organization for payment of purchases, then such purchases are subject to tax. For more information, see Virginia Public Document Ruling 13-9.

Washington Issues Guidance on Digital Products
The Washington Department of Revenue has amended and issued new rules to explain the impact of 2009 and 2010 legislation that imposed sales and use tax on digital products. WAC 458-20-15501 has been amended and provides rules regarding the taxation of the wholesale sale, retail sale, and manufacturing of computer systems and computer hardware, as well as the taxation of other activities associated with computer hardware, including installation, repair, and maintenance. The Department has adopted new rule, WAC 458-20-15502, which addresses the taxation of computer software, exemptions, site licenses of prewritten software, keys to activate software, royalties for licensing of software, and other activities associated with software, including customizing prewritten computer software; installation and uninstallation; repair, alteration, and modification of software; and software maintenance agreements. The Department has also adopted new rule, WAC 458-20-15503, which provides a structured approach for determining tax liability for digital products and digital codes. Finally, WAC 458-20-155 is repealed. The new and amended rules become effective on March 28, 2013.

For more information, contact Donna Niesen at dniesen@ksmcpa.com. 

This editorial piece by Tim Cook ran in the March 2, 2013, issue of the Indianapolis Business Journal.

In a time when state and local officials make economic development announcements every day, an increasingly common question is, “How does this benefit me?”

For the company receiving incentives, that answer is easy enough; whether it be tax credits or a training grant, they receive some form of financial support. But, what about state and local government, and the public at large—what’s in it for them?

As this question comes up more and more, state and local governments have sought to better quantify the benefits of these deals and portray this benefit to the public. This evolution is a good thing for everyone affected by the process.

Some benefits are easy to quantify. Each job created can be counted. Everyone agrees that the creation of jobs benefits the economy. And for each job created, a certain amount in state and local income tax will be generated.

When a company buys equipment, it will pay state sales tax. There will also be property tax expense on the company’s real estate, regardless of whether it leases or owns the building.

These taxes add up to a total amount that can be tangibly identified.

Beyond the simple adding and subtracting of tax benefits, state and local governments are able to estimate payoff on economic development projects in a more macro fashion. They do this in a lot of ways.

Many communities subscribe to software programs that estimate total economic impact of these projects, or they may pay a third-party economist to do the analysis.

These resources project spending, jobs, tax dollars and other positive economic impacts that a new project will support and create.

Some localities have begun to ask more specific questions about where current and future employees reside, as this affects local income taxes allocated to communities.

Some units of government take it a step further, actually seeking to tie incentives to the local income tax the company withholds from employees, similar to what the state has done with its job creation tax credit for many years to ensure the incentives are performance-based and self-policing.

Other benefits may include a project’s serving as an impetus to a dormant redevelopment area, or expanding a community’s or state’s penetration within a particular industry. Some projects also may have a multiplier effect, serving as anchors or attracting suppliers and related businesses within a given proximity.

Then there is the question of civic involvement by the company. Companies often will be asked how they intend to interact with and give back to the community at large. More and more, localities are seeking specific commitments, whether participating in the United Way, joining the local chamber of commerce or sponsoring a summer internship program through a local community college.

These softer forms of public-private partnerships can be dismissed as too touchy-feely, but the fact is that such involvement can be vitally important for the long-term good of a community and its efforts to promote a better quality of life.

A prime example of this was the fundraising initiative by area businesses to land the 2012 Super Bowl. The corporate philanthropic spirit that intervened to support this effort was rooted in a public-private partnership model that includes groundwork laid by a strong economic development infrastructure.

By fostering this sense of civic readiness in companies, whether it be in recognition of economic development support for a project or just general interaction with like-minded businesses, central Indiana strengthens its foundation for similar future successes.

In recent years, some economic development deals have become more complex, employing less-often-used incentives like tax increment finance and similar bond devices. As a deal increases in complexity, the level of scrutiny increases with it, and that, too, is a good thing.

These tools will continue to play a positive role in the economy only if they consistently produce winning projects and provide reliable security to state and local government for the incentives they employ.

Economic development deals need to pay for themselves as well as provide the opportunity for greater benefits to come. The better job that company officials and officeholders do in educating the public about the return on investment potential of these deals, the more equipped the public will be to appreciate the need to promote support for economic development projects in their communities.

Tim Cook is the partner in charge of Katz Sapper & Miller’s State and Local Tax Practice. Views expressed here are the author’s.

The Indiana General Assembly has passed legislation providing for an Automatic Taxpayer Refund (ATR) credit for tax year 2012. This credit is a refundable credit and is $111 per eligible taxpayer ($222 for an eligible married couple filing a joint return). In order to qualify for the credit, you must meet all three of the following qualifications:

1. Timely filed (including extensions) a full-year Indiana resident income tax return for tax year 2011;
2. Timely file (including extensions) a full-year Indiana resident income tax return for tax year 2012;
3. Owe some tax to the state for 2012. 

How do I determine if I am eligible for the credit, and how do I calculate it? 

In order to determine if you qualify for the credit, you can walk through the following steps: 

Step 1: Determine if you meet the prior year filing requirement (view flowchart)

Step 2: Determine if you meet the current year filing requirement (view flowchart)

Step 3: Determine if you have a modified state tax liability

In order to claim the ATR credit, you must have a modified state tax liability. Your modified state tax liability is your gross income tax liability less the following credits: 

• College Contribution Credit
• Credit for Taxes Paid to Other States
• Unified Tax Credit for the Elderly
• Earned Income Credit
• Lake County Residential Income Tax Credit
• Other Specific Credits

If your modified state tax liability is greater than zero, continue to Step 4. If it is less than zero, STOP. Neither you nor your spouse (if married filing jointly) can take the credit. 

Step 4: Determine your ATR credit

If you are single or married filing separately, your ATR credit is $111. If you are married filing jointly, continue below: 

1. If you timely filed a 2011 Indiana full-year resident income tax return AND you are timely filing a 2012 Indiana state income tax return, the credit associated with you is $111. If not, the credit associated with you is zero.
2. If your spouse timely filed a 2011 Indiana full-year resident income tax return AND your spouse is timely filing a 2012 Indiana state income tax return, the credit associated with your spouse is $111. If not, the credit associated with your spouse is zero.

Add the results from 1 and 2 above to get the total ATR credit associated with you and your spouse.

What else do I need to know? 

It is important to note that dependents are not eligible to claim the ATR unless they file their own state tax return. Also, you must have a tax liability in order to qualify. This liability is determined before withholding is taken into account but after credits, deductions and exemptions. 

In order to qualify, as noted above, your income tax returns must be “timely filed.” In order to be timely flied, the following must have occurred:

• Your 2011 Indiana tax return must have been filed by the 4/17/12 due date, unless it was extended. 
• Your 2012 Indiana tax return must be filed by the 4/15/13 due date, unless it was extended. 

If your return(s) were extended, the return must have been (or will be) filed within the extension period. 

Examples

1. Brandon has $22,000 wage income and claims a $1,000 exemption. His state tax due before credits is $714 ($22,000 - $1,000 = $21,000 X .034 state tax rate = $714 modified state tax liability). His state withholding credit is $800. Even though Brandon had more than $714 withheld, he still qualifies for the $111 ATR credit. With the $111 ATR credit and his $86 overpayment of taxes, his total refund is $197.
2. Olivia has $742 wage income and claims a $1,000 exemption. Her state tax due before credits is zero ($742 - $1,000 = -$258 = no modified state tax liability). Her withholding credit is $25. Since she doesn’t have a modified state tax liability, she is not eligible for the ATR credit. Olivia’s refund is $25.
3. Jim had a valid state extension of time to file (he filed a Form IT-9 as well as a federal Form 4868), which extended the time he had to file his 2011 state tax return to Nov. 15, 2012. He filed on June 11, 2012. Therefore, his 2011 state return was timely filed and, assuming he meets the other eligibility conditions, he would be able to claim the ATR credit. 

Comment Period Expires for Proposed Financial Reporting Framework for SMEs

The comment period for the AICPA’s Proposed Financial Reporting Framework for Small- and Medium-Sized Entities (SMEs) ended Jan. 30, 2013. The Financial Reporting Framework for SMEs will provide a special purpose framework of accounting that blends traditional methods of accounting with income tax methods. The framework is intended to serve as a less complex and less costly alternative to generally accepted accounting principles in the United States (U.S. GAAP) and is intended for smaller-to-medium-sized, owner-managed, for-profit entities where users of the financial statements have direct access to the owner-manager. The framework is for entities that are not required to have U.S. GAAP financial statements.

Once the final document is released, owner-managed entities may wish to consider this alternative. Owner-managers should consult with their CPA practitioners, lenders and other users of the financial statements prior to changing the accounting framework of their companies. See the AICPA resource page for additional information.

FASB Issues ASU on Balance Sheet Offsetting

The FASB issued Accounting Standards Update (ASU) No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, to clarify the scope of ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. ASU 2013-01 indicates that ASU 2011-11 applies only to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that either offset in accordance with specific criteria included in Section 210-20-45 or Section 815-10-45 of the Codification or are subject to a master netting arrangement or similar agreement. Ordinary trade receivables and payables are not in the scope of ASU 2011-11, which was intended to provide comparable information about balance sheet offsetting between financial statements prepared on the basis of U.S. GAAP and financial statements prepared on the basis of International Financial Reporting Standards.

Entities with derivative arrangements described above will be impacted by this update. Entities are required to apply the amendments for fiscal years beginning on or after Jan. 1, 2013, the same effective date as ASU 2011-11, and should provide the required disclosures retrospectively for all comparative periods presented.

FSAB Issues ASU on Amounts Reclassified Out of Accumulated Other Comprehensive Income

The FASB has also issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the reporting of reclassifications out of accumulated other comprehensive income (AOCI). The ASU requires entities to provide information about amounts being reclassified out of AOCI by component of other comprehensive income. The ASU further requires the presentation of significant amounts reclassified out of AOCI by respective line items of net income, if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. The presentation must be in one location but may be provided in the notes to the financial statements or in the statement where net income is presented. For amounts not required to be reclassified in their entirety to net income under U.S. GAAP, an entity must cross-reference to other disclosures providing additional detail about these amounts.

ASU 2013-02 will impact all entities that report items of other comprehensive income, but does not substantially change the information being presented. For nonpublic entities, the update is effective prospectively for reporting periods beginning after Dec. 15, 2013, with early adoption permitted.