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State & Local Tax Update: 3/5/15

Posted 8:16 PM by

Potential Changes to Indiana Assessing Special Use Properties

Property taxes are getting a lot of attention in this year's Indiana legislative session. KSM's State and Local Tax Practice is tracking a handful of bills under consideration that could directly affect our clients, including SB 436, which is a bill that attempts to change the way Indiana assesses first-generation special use properties.Special use properties could include, but are not limited to, buildings of 50,000 square feet or more (commonly referred to as big box stores), fast food restaurants, national retail drug stores, and industrial properties. The draft bill is indicating that the market value-in-use for these type of properties should be derived from applying the cost approach to the buildings and adding the land cost to that value. This new method could have an impact on the way Indiana assesses first generation special use properties.

This legislation is in response to two recent Indiana Board of Tax Review decisions:

Meijer Stores LP v. Marion County Assessor and Kohl's Indiana LP v. Howard County Assessor.

In these decisions, the Indiana Board of Tax Review (IBTR) ruled that the county assessor must reduce the assessed value for all years under appeal to the appraised valuation that Meijer and Kohl's submitted. In both cases, each party submitted appraisals and the IBTR ruled in favor of the taxpayer. The taxpayers' appraisals used sales and rental information of second generation stores. Some of the comparable stores were vacant (dark boxes) at the time of the sale but the sales comparisons were used to value an operating store. Both of these decisions are being appealed to the Indiana Tax Court, so their permanent impact is in limbo. In the meantime, SB 436 is a legislative attempt to statutorily resolve the issues raised in these decisions regarding comparing operating stores to dark boxes. 

If you have any questions regarding SB 436 or how this could affect your property, contact Katz, Sapper and Miller's property tax leader, Chad Miller, or state and local tax manager, Heather Judy. We would be happy to discuss this with you.

Indiana Tax Court Rules Company Not Creating New Product; Not Entitled to Manufacturing  Exemption: A manufacturer of cryogenic tanker trailers was denied a sales tax exemption on utility consumption related to the rehab portion of its business. Although taxpayer produced new trailers, a portion of its business was related to rehabilitating/refurbishing used tanker trailers that were forced out of service because they could no longer hold a vacuum. The Court determined that the rehabilitation portion of the business was taxable repair activity and not exempt manufacturing activity because it did not meet the four-pronged test set forth in Rotation Products. See Alloy Custom Products,Inc. v. Indiana Department of Revenue for more information.

Massachusetts to Offer Amnesty Program: Governor Baker recently signed H52 , which includes a provision to allow a 60-day tax amnesty program. The parameters of the program will be set by the Commissioner of Revenue but must include provisions to abate penalties for taxes paid under the amnesty program and must create a method to prevent any taxpayer utilizing the amnesty program from utilizing any future amnesty programs for the next 10 years.

Missouri Court Finds Franchise Tax Nexus Via LP Interest: A taxpayer was engaging in business in Missouri and subject to the Missouri franchise tax because it had employed its assets (its interests in an LP that was doing business in the state) in Missouri. In making its decision, the Court concluded that for purposes of deciding whether the corporation was subject to franchise tax, it does not matter whether the corporation engaged in business in Missouri by employing a wholly owned limited partnership or whether it engaged in business in the state by employing the LP's assets directly. See Southwestern Bell Telephone Company v. Director of Revenue for more information. 

New York Approves Grants to Investigate Tax Evasion: Governor Cuomo recently announced that 28 district attorneys' offices will receive more than $14.7 million in grants to enhance their investigation of state tax evasion and welfare fraud cases. The grants are funded via New York's Crimes Against Revenue Program. The grants will fund investigations of sales, excise and income taxes; focusing on individuals, corporations or industries and will include complex financial fraud and tax evasion schemes by major criminal enterprises. See 2-19-15 Press Release for more information.

Tennessee Issues Ruling on 338(h)(10) Election: The Tennessee Department of Revenue has issued a letter ruling that discusses the effect on Tennessee excise tax of making a Code Sec. 338(h)(10) election when an S corporation is sold. S corporation shareholders sold all of their stock in the S corporation to a purchaser and both parties made the Code Sec. 338(h)(10) election to treat that sale as a deemed sale of assets. In addition to the payments due for the stock at the time of the purchase, the shareholders were also due earnout payments if the performance of the corporation exceeds certain thresholds. The Department stated that the selling corporation must include the gain from the deemed sale of assets in its taxable income in the same tax year that those gains were recognized for federal tax purposes. The Department also stated that although the earnout payments will be made to the former shareholders of the S corporation and not to the corporation, those payments must be included in income by the corporation on federal Form 1120S and must be included in taxable income for Tennessee excise tax purposes in that same tax year. See Letter Ruling14-15  for more information.

Texas Rules Fuel Surcharge Reimbursements Are Deductible From Total Revenue: The Texas Comptroller has ruled that a freight transporter reporting under a reimbursement theory for federal purposes was allowed to exclude fuel surcharge reimbursements from total revenue and deductible expenses in calculating its Texas franchise tax. In this case, since the taxpayer excluded the reimbursements from both revenue and deductible expenses on its federal income tax return, the federal gross receipts reported on Line 1c of the federal return was properly included in its total revenue calculation on the Texas franchise tax return. See Decision 107,457 for more information.

About the Author
Donna Niesen is a partner in Katz, Sapper & Miller’s State and Local Tax Group. Donna helps keep clients up-to-date on the multitude of tax rules and requirements in all 50 states. She guides them in the right direction as they address the complex issues that emerge on both the state and local levels. Connect with her on LinkedIn.