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    State & Local Tax Update - 3/18/13

    Posted 7:25 PM by

    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

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    Economic development deals need to benefit all sides

    Posted 1:17 PM by

    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.

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    Qualifying for the Automatic Taxpayer Refund Credit

    Posted 5:08 PM by

    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. 
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    Standards Updates - 2/19/13

    Posted 8:50 PM by

    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.

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    State & Local Tax Update - 2/13/13

    Posted 2:37 PM by

    Reassessment for Indiana Real Property Taxes
    Indiana counties are currently wrapping up their 2012 statewide reassessments. During a reassessment year, county and township assessors are required to inspect all properties and adjust all assessed values to properly reflect market value in use. Counties were last required to reassess property in 2002; therefore, some property owners should expect significant changes as a result of the 2012 reassessment. 

    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. Many counties have already mailed their assessments, and the 45-day appeal period is well underway. In fact, Lake County mailed Form-11s Jan. 5, which means the deadline to appeal the Lake County assessment is Feb. 19, 2013. Additionally, Madison County mailed Form-11s Jan. 11, which means the deadline to appeal the Madison County assessment is Feb. 25, 2013.

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

     

    Indiana Issues Sales Tax Ruling on Vehicle Leasing
    An automobile dealership engaged in vehicle leasing was subject to sales tax on the satisfaction of unpaid lease obligations received from unrelated third-party dealers. The taxpayer leased automobiles to customers ("lessees") and held title to the vehicles during the lease period. Although the taxpayer collected and remitted sales tax as lease payments were received from the lessees, it failed to collect sales tax or pay use tax on early termination payments received from third-party dealers. An "early termination" occurs when a lessee enters into a new purchase or lease agreement with a third-party car dealer before the end of the current lease agreement with the taxpayer. The third-party dealer pays off the lessee's remaining obligation, in addition to purchasing the vehicle from the taxpayer. An audit concluded that the portion of the payoff amounts received from the third-party dealers was subject to sales tax because the payments were part of the lease consideration as indicated in the lease agreement executed between the taxpayer and the lessee; the payments by the dealers relieve the lessees from liability to the extent that the lease obligation is satisfied. Pursuant to Ind. Admin. Code 45 § 2.2-4-27(d)(1), all consideration received and provided for in the lease contract for the rental of property is subject to tax. The Department disagreed with the taxpayer's contention that the transactions were resale sales because it directly sold the leased vehicles to third-party car dealers who purchased those vehicles for resale purposes. (See LOF 04-20110564 for details.)

    Louisiana Requires E-filed Extensions
    Effective Jan. 20, 2013, the Louisiana Department of Revenue adopted an amendment to an administrative rule that governs the procedure for obtaining corporation income and franchise tax return filing extensions. The amended rule provides that, beginning with returns due on April 15, 2013, taxpayers seeking to obtain a corporation income and franchise tax return filing extension must submit the extension request electronically on or before the return due date. An electronic extension request can be submitted via the department's website, tax preparation software, or any other electronic method authorized by the secretary of revenue.

    Rhode Island Impose $500 fee on Partnerships/LLCs
    The Rhode Island Division of Taxation has issued a special edition newsletter focusing on the 2013 filing season. Recently enacted legislation requires limited partnerships and limited liability partnerships to pay an annual charge or filing fee of $500 starting with tax year 2012. In addition, new for this season, Form RI-1065, Rhode Island Partnership Income Returns, will be filed by limited partnerships, LLPs, general partnerships, and LLCs (including SMLLCs). (Rhode Island Tax News 01/01/2013)

    Utah Issues Notice on Successor Liability
    The Utah State Tax Commission has issued a notice informing taxpayers who are selling a business that they must file final tax returns within 30 days of the sale, close all open tax accounts with the commission, and provide the purchaser with a receipt or letter from the commission showing no sales taxes are owed. Taxpayers purchasing a business are required to apply for new tax licenses since tax licenses are not transferable, obtain a receipt from the seller showing that all sales taxes have been paid, or that no sales taxes are due, and withhold any amount of unpaid tax from the purchase price to pay to the commission within 30 days of the final sale of the business. Purchasers may be held liable for previous sales taxes the business may owe if they do not meet the foregoing requirements. Note that if business ownership changes, but the federal employer identification number is allowed to stay the same by the IRS, the new owner is not required to obtain new tax account numbers with the commission; however, the new owner must notify the commission with the new owner and officer information. See the Successor Liability Notice for details.

    Wisconsin Updates Sales Tax Guidance on Software
    The Wisconsin Department of Revenue has updated its guidance on the sales and use tax treatment of computer hardware, software and services. The release discusses sourcing rules for the following: (1) determining the location where a sale takes place; (2) prewritten computer software; (3) computer-related repair services and repair parts; (4) computer software maintenance contracts; and (5) software term licenses and software subscriptions. The release provides a discussion of bundled transactions, the definition of "prewritten computer software," and taxable and nontaxable sales of computer hardware, software and services. The release also discusses whether sales tax must be paid on software that is obtained over the Internet and Wisconsin's treatment of cloud computing components. See sales tax FAQs for details.

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

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    Tax-Free Transfers to Charity Renewed for IRA Owners 70½ or Older

    Posted 8:21 PM by

    Transfers in January 2013 Can Still Count for 2012

    Certain owners of individual retirement accounts (IRAs) have until Jan. 31, 2013, to make tax-free transfers to eligible charities and have them count for tax year 2012.

    The American Taxpayer Relief Act of 2012 - enacted Jan. 2, 2013 - extended for 2012 and 2013 the provision authorizing qualified charitable distributions (QCDs), which are transfers from an IRA owned by someone age 70½ or older, directly to an eligible charitable organization. Each year, the IRA owner can exclude from gross income up to $100,000 of these QCDs. This provision had expired at the end of 2011.

    The QCD option is available regardless of whether an eligible IRA owner itemizes deductions on Schedule A. Transferred amounts are not taxable and no deduction is allowed for the transfer. However, Indiana has an add back for this transfer; thus, it is taxable for Indiana residents. QCDs are counted in determining whether the IRA owner has met his or her IRA required minimum distributions for the year.

    For tax year 2012 only, IRA owners can choose to report QCDs made in January 2013 as if they occurred in 2012. In addition, IRA owners who received IRA distributions during December 2012 can contribute, in cash, part or all of the amounts distributed to eligible charities during January 2013 and have them count as 2012 QCDs.

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    State & Local Tax Update - 1/18/13

    Posted 4:16 PM by

    Reassessment for Indiana Real Property Taxes
    Indiana counties are currently wrapping up their 2012 statewide reassessments. During a reassessment year, county and township assessors are required to inspect all properties and adjust all assessed values to properly reflect market value in use. Counties were last required to reassess property in 2002; therefore, some property owners should expect significant changes as a result of the 2012 reassessment.

    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. Many counties have already mailed their assessments, and the 45-day appeal period is well underway. In fact, Marion County mailed Form-11s Dec. 14, which means the deadline to appeal the assessment is Jan. 28, 2013.

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

     

    Indiana Imposes New E-File Rules
    The Indiana Department of Revenue has issued additional guidance concerning the new electronic filing mandate for business taxpayers filing and remitting sales and withholding taxes. The department reminds taxpayers that Indiana offers an electronic filing and payment system for business taxpayers called INtax. The system allows business taxpayers to report and remit certain taxes and make payments. Since all Indiana businesses are now required to report and remit sales tax and withholding electronically, the Department will discontinue mailing coupons for sales and withholding taxes. Taxpayers will need to report and remit electronically or fail to comply with the law. See the recent guidance issued by the IDOR on 1/9/13 for additional information.

    Indiana Rules on Residency
    Taxpayers with a current Florida address and owning a house in Indiana were required to file an Indiana income tax return because they were domiciled in Indiana during the taxable year. The taxpayers, a husband and wife, claimed Florida residency for the taxable year, despite owning a home in Indiana, as well as automobiles which were properly titled and registered at the Indiana Bureau of Motor Vehicles. Additionally, the husband incorporated an Indiana company in 1999 and has been the president of the company since. Although the taxpayers purchased another house and additional vehicles in Florida, the department determined that they were taxable at the place which they were originally domiciled, provided the opening of the other home has not involved an abandonment of the original domicile and the acquisition of a new one. Because documentation provided by the taxpayers showed that the husband continued to work for the company located in Indiana as the president of the company and the company's filings to the state of Indiana for the year at issue listed that the husband resided in the Indiana residence, the compensation received from the company would have been Indiana source income and subject to Indiana income tax. Therefore, the taxpayers were obligated to file their Indiana income tax return and their income is taxable in Indiana. See LOF 01-20120180 for details.

    Indiana Rules on Equipment Lease with Operator
    A medical practice's contract with an imaging company, which provided imaging equipment and operators, did not constitute a lease of tangible personal property and, therefore, the payments made by the medical practice were not subject to use tax. Ind. Code § 6-2.5-1-21 defines a lease or rental as any transfer of possession or control of tangible personal property for a fixed or indeterminate term for consideration and may include future options to purchase or extend. A lease does not include providing tangible personal property along with an operator for a fixed or indeterminate period, if the operator is necessary for the equipment to perform as designed, and the operator does more than maintain, inspect, or set up the tangible personal property. Because the medical practice provided sufficient information that the imaging company provided both equipment and operators who are "necessary for the equipment to perform as designed" and who do "more than maintain, inspect, or set up the tangible personal property" within the meaning of the statute, the contract was not considered a lease. See LOF 04-20110484 for details.

    Illinois Cook County Enacts New Tax
    On Nov. 9, 2012, the Cook County Board of Commissioners approved and adopted Ordinance No. 12-O-63, which imposes a tax on the privilege of using in Cook County non-titled personal property which was purchased outside of the County. Effective April 1, 2013, the tax will be levied at rate of 1.25% of the non-titled personal property's value when first subject to use in the County. See the ordinance for details.

    Michigan Expands Definition of Rolling Stock
    Recently passed legislation expands the definition of "rolling stock" for purposes of the use tax to mean a qualified truck, a trailer designed to be drawn behind a qualified truck, and parts or other tangible personal property affixed to or to be affixed to and directly used in the operation of either a qualified truck or a trailer designed to be drawn behind a qualified truck. In addition, the rolling stock exemption has been expanded to provide that "rolling stock" includes other tangible personal property affixed or to be affixed to and directly used in the operation of either a qualified truck or trailer designed to be drawn behind a qualified truck. See H5444 and H 5445 for details of the changes.

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

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    Changes to Indiana Sales Tax Policy on Maintenance and Warranty Contracts

    Posted 8:15 PM by
    The Indiana Department of Revenue recently announced significant changes to its sales tax policy regarding sales of optional maintenance and warranty contracts. The policy change was announced via an updated Information Bulletin #2, effective Jan. 1, 2013.
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    2012 Taxpayer Relief Act Extends Research Credit

    Posted 7:06 PM by
    The 2012 Taxpayer Relief Act signed into law by President Obama Jan. 2, 2013, extended several of the business tax breaks that had expired as of Dec. 31, 2011.  The Research and Expense Credit is one of the tax breaks retroactively extended in the Act. The credit now applies to qualified research expenses paid or accrued after Dec. 31, 2011, and before Jan. 1, 2014, thus allowing companies to take advantage of the tax benefits for a few more years.
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    Changes to Indiana Sales Tax Policy on Maintenance and Warranty Contracts

    Posted 4:43 PM by

    The Indiana Department of Revenue recently announced significant changes to its sales tax policy regarding sales of optional maintenance and warranty contracts. The policy change was announced via an updated Information Bulletin #2, effective Jan. 1, 2013.

    Note: The Department's positions on mandatory maintenance contracts and maintenance contracts related to software have been unchanged by the updated bulletin.

    The Department's former policy was to treat optional maintenance and optional warranty contracts the same, imposing tax on the sale of either type of contract when it contained a right to have tangible personal property and there was a reasonable expectation that property would be provided under the contract.

    The updated bulletin outlines the following state policies:

    1. Redefines warranty contracts to distinguish them from maintenance contracts
    2. Specifically states that the substance of the contract overrules its given title
    3. Reiterates its policy that maintenance contracts are taxable at the time of sale when it is expected that more than a de minimis amount of tangible personal property will be transferred during the term of the contract
    4. Establishes that contract sales meeting the definition of warranty are not taxable transactions

    Optional Maintenance Contracts

    Maintenance contracts include agreements where, at the time the contract is entered into, tangible personal property is expected to be supplied during the term of the contract. The Department's position per the updated bulletin is that these contracts are taxable bundled transactions unless the tangible personal property component is de minimis (i.e., makes up less than 10 percent of the total value of the transaction). This de minimis test would appear to require parties to quantify the anticipated breakdown between tangible personal property and services at the time the contract is entered into in order to establish whether or not the transaction is taxable. Taxpayers selling taxable maintenance contracts do not pay sales tax on their purchases of items used to fulfill their obligations under the contract.

    Optional Warranty Contracts

    A warranty contract is defined as "a contract that acts like insurance against future potential repair costs," and consists of agreements where there may never be any tangible personal property or services provided to the customer. The Department's new position per the updated bulletin is that sales of optional warranty contracts are not taxable because it cannot be determined at the time the contract is entered into whether tangible personal property will be transferred. The warranty provider must pay sales or use tax on all purchases of items used to fulfill its obligations under the contract.

    The bulletin is silent as to how the Department will treat taxpayers that observed the policies detailed in the information bulletin prior to its issuance. Because the changes articulated in the bulletin are not the result of a law change, taxpayers that have retroactive exposure as a result of the old policies may have newfound support for their position as a result of this revised information bulletin being issued.

    For more information, contact Tim Cook or Donna Niesen in Katz, Sapper & Miller's State and Local Tax Practice.

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