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State & Local Tax Update - 8/6/13

Posted 8:11 PM by

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. 

 

Indiana Rules on Business v. Nonbusiness Income
A waste handling and recycling equipment manufacturing company's income, derived from a corporate restructuring, was classified as apportionable business income. The taxpayer, originally organized as a C corporation, voluntarily converted into a limited liability company. For federal income tax purposes, the conversion to an LLC was considered a taxable sale of assets for their fair market value, and the taxpayer recognized gain on the transaction equal to the difference between the proceeds and its basis in the assets sold. Ind. Code § 6-3-1-20 defines the term “business income” as income arising from transactions and activity in the regular course of the taxpayer's trade or business and includes income from tangible and intangible property if the acquisition, management and disposition of the property constitutes integral parts of the taxpayer's regular trade or business operations. Accordingly, the term “nonbusiness income” means all income other than business income.

Because the taxpayer did not provide the Indiana Department of State Revenue with sufficient information to allow a determination as to whether the income from the sale of business assets falls outside the scope of what constitutes its business income, the Department decided to treat it as business income until the taxpayer is able to show why the income should be treated as nonbusiness. The Department also determined that the taxpayer's sales of intangible business assets within Indiana are to be apportioned to Indiana and included in the taxpayer's calculation of the sales factor. See Revenue Ruling IT 2013-01 for details.

Indiana Tax Court Rules on Income from Partnership Interest
The Indiana Tax Court has ruled that the income a telecommunications company received as a partner of a general partnership had the character of operational income and was therefore subject to the adjusted gross income tax. The company owned a 45 percent interest in a general partnership that provided wireless voice and data services and communications equipment to customers throughout the U.S. Upon receiving its distributive shares of partnership income, the company filed Indiana adjusted gross income tax returns, reporting a portion of its income was attributable to, and therefore taxable by, Indiana. However, the company subsequently amended its returns and sought a refund of the tax it paid on the basis that it had erroneously determined that its income was derived from sources within Indiana; the Indiana Department of State Revenue denied the refund claim.

In an original tax appeal, the company argued that despite the fact it was a partner in a general partnership, a “lack of control” placed it in essentially the same position as being a limited partner, or a true “passive investor,” and accordingly, its income was dividend income received from investing in the partnership – not income derived from sources within Indiana, and therefore not taxable. However, the Court concluded that the mere fact the company was a partner in a general partnership gives its income from that partnership the character of operational income; as such, its distributive share of income is not income in the form of dividends from investments and, therefore, subject to tax. See Vodafone Americas Inc., et al. v. Indiana Department of State Revenue for details of the case. 

Arizona Conforms to §179
Arizona law limits its addition to income for Code Sec. 179 expense deductions in excess of $25,000 to tax years beginning before Jan. 1, 2013. Thus, for tax years beginning on or after that date, Arizona conforms to Code Sec. 179.

Illinois Supreme Court Upholds Amnesty Double Interest
The Illinois Supreme Court has held that the phrase “all taxes due” in the state's 2003 Tax Amnesty Program means taxes that were properly reportable when the initial tax return was required to be filed, rather than taxes known to be due during the amnesty period. As such, a corporation that failed to make a good-faith estimate of its increased tax liability and also failed to pay tax owed during the amnesty period was subject to the program's double interest penalty. See Metropolitan Life Insurance Co., et al. v. Hamer, et. al. for details.

Massachusetts Updates Pass-Through Withholding Guidance
The Massachusetts Department of Revenue amends an existing regulation to clarify and reflect changes in the way it administers the withholding program. In particular, the information originally required on an annual schedule for pass-through entities is now obtained via electronically filed schedules K-1. Changes allow entities to collect exemption certificates from exempt members only once (rather than annually) and provide that the certificates remain valid until revoked. Amendments also allow more time for the exemption certificates to be collected; they are now due at the end of the fourth month of the entity's taxable year, rather than the end of the first month. (830 CMR 62B.2.2, effective Aug. 2, 2013.)

Minnesota Issues Guidance Regarding Treatment of QSSS
The Minnesota Department of Revenue has issued a revenue notice explaining the Minnesota income tax and corporate franchise tax treatment of a qualified Subchapter S subsidiary (QSSS). Included in the summary is a discussion of the disregarded nature of QSSS in Minnesota for both income and minimum fee calculation purposes. See Notice 2013-01 for details.

Nebraska Updates Guidance on Warranty/Maintenance Contracts
The Nebraska Department of Revenue has updated its sales and use tax information guide concerning warranties, guarantees, service agreements and maintenance agreements – all of which are taxable when the property covered or the services to be provided are taxable. The guide lists several examples of taxable maintenance agreements, which include agreements covering: appliances and building/fixtures; computer hardware and prewritten and custom software; copiers, printers and scanners; live plants; machinery; mobile devices; and motor vehicles.

Sales tax is due on a taxable maintenance agreement whether the agreement is sold by the retailer of the property or by a third party, and regardless of how the charges are invoiced. Sales of taxable maintenance agreements are subject to sales tax regardless of whether the agreement is mandatory or optional. A charge for the renewal or extension of a taxable maintenance agreement is also taxable. Taxable maintenance agreements are subject to sales tax at the rate imposed at the location of the property covered by the agreement at the time of the sale of the agreement. The guide also lists several types of maintenance agreements that are sales tax exempt. Additionally, the guide provides specific rules related to the taxability of repair labor or replacement parts when furnished under labor-only maintenance agreements as well as maintenance agreements that do not provide full coverage for parts and labor. See Nebraska Information Guide 6-516-2013 for details.

New York Appellate Court Upholds MTA Payroll Tax as Constitutional
The New York Supreme Court, Appellate Division, reversing the trial court, has declared that the Metropolitan Commuter Transportation Mobility Tax Law was properly enacted and, therefore, the Metropolitan Transportation Authority payroll tax is constitutional. See Mangano, et al. v. Silver, et al. for details.

Ohio Makes E-File/E-Pay Mandatory for All CAT Taxpayers
The Ohio Department of Taxation has issued a release that contains an amendment to Ohio Adm. Code 5703-29-05, specifying that both annual and quarterly CAT taxpayers must file and pay electronically. The amendment to this rule addresses the change in L. 2013, H59, which allows the Tax Commissioner to require an annual taxpayer to file and pay electronically. The Department intends to have annual taxpayers file and pay electronically with tax periods beginning on Jan. 1, 2014.

Tennessee Revises Local Business Privilege Tax
Tennessee recently revised the business privilege tax laws so that all five classes of business privileges are subject to tax by the state, except where a municipality levies a business tax, by ordinance, on classes one through four, in which case the privileges are subject to tax by the municipality. Every municipality levying the tax as of Jan. 1, 2014, is treated as having made an election to continue its tax at the same rate that was already in effect and is not required to pass an additional ordinance. Any incorporated municipality that elects, after Jan. 1, 2014, to levy the tax or to change the rate of the tax, must levy the tax at the rates fixed and provided in present law.

Any person engaged in Tennessee – in a business that falls under classes one through four but without a physical place of business in the state – is subject to the state business tax and exempt from the municipal business tax. For purposes of the tax, a business would be engaged in business in Tennessee if it: 1) performed any service in Tennessee that was received by a customer in Tennessee; 2) leased tangible personal property in Tennessee; 3) delivered tangible personal property to a buyer in Tennessee, if delivered by the seller in the seller's own vehicle; or 4) purchased and subsequently sold tangible personal property in Tennessee in a wholly in-state transaction, where the purchase and sale were accomplished through the presence in Tennessee of the seller's employees, agents, or independent contractors.

The law revises the current exemption for any business in Tennessee having a total value of sales of less than $3,000 per year and instead provides that: 1) any person having sales of less than $10,000 within a county would be exempt from the state business tax and the licensing provisions with respect to the sales sourced to that county; 2) any person having sales of less than $10,000 within a municipality would be exempt from the municipal tax and the licensing with respect to the sales sourced to that municipality; and 3) any person subject to the tax who does not have a place of business in Tennessee and has sales of less than $10,000 within a county would be exempt from the tax with respect to the sales occurring in that county.

The law also provides that the minimum business tax of $22 applies per location, and that any person subject to the tax that has no established place of business in Tennessee is subject to a single $22 minimum tax for all activity within Tennessee. If a taxpayer has more than one location within the county or municipality, a separate license, and payment of the $15 license fee, would be required for each location; persons who are not only exempt from the business tax and licensing requirements but also have sales between $3,000 and $10,000 per year within the jurisdiction must be issued a minimal activity license upon application and payment of $15. Under the law, the business tax will not apply to providers of direct-to-home satellite television programming services for any tax year that begins on or before July 1, 2014, and the business tax on sales of gasoline and diesel fuel at wholesale decreases from 0.1 percent to 0.03125 percent. Finally, the law requires the Commissioner to allow a single, electronic business tax filing that includes all of the information required by the Commissioner to determine the amount of tax properly due to each jurisdiction. See SB 183 for details.

Texas Enacts Amendments to Franchise Tax
On June 14, 2013, Texas Governor Rick Perry signed legislation that amends the state's franchise tax. For report years 2014 and 2015, a temporary election for lower tax rates is provided. Additionally, the bill also provides exemptions, exclusions and a credit for the rehabilitation of historic structures as well as other computational and reporting changes. Changes include an exclusion from total revenue of motor carriers for flow-through funds derived from taxes and fees, and repeal of the provision requiring a combined group to include gross receipts for each member of the group that does not have nexus with Texas in its report. Changes are effective Jan. 1, 2014. See HB 500 for details.   

Washington Enacts Exemptions from B&O Tax
On June 30, 2013, Washington Governor Jay Inslee signed into law legislation expanding Business and Occupation (B&O) tax and sales and use tax preferences. The bill creates or extends exemptions for taxpayers in numerous businesses and industries, including payroll services, agriculture, restaurants, financial information, alternative energy, blood and tissue collection, amusement and recreation, and aviation. See S5882 for details. 

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

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