2022 Indiana Legislative Update
When Indiana legislators reconvened for this year’s short session, hopes were high that big changes were on the horizon. But even with Republicans controlling both the House and the Senate, few of the proposed tax bills made their way to Gov. Holcomb’s desk to be signed into law. Many of the exciting new tax bills that had been in the works for months got pushed to the backburner … yet again. However, a handful of tax-related bills crossed the finish line that are worthy of the business community’s attention.
New Tax Cuts
Gov. Holcomb approved a comprehensive, $1.1 billion tax cut for Indiana taxpayers. The main provision in House Bill 1002 calls for a gradual reduction of the individual income tax rate, shifting from its current rate of 3.23% down to 2.9% by 2028. The rate drop is contingent on the state achieving a 2%+ annual revenue growth year over year, but assuming the state prevails, in 2028, Indiana would have one of the lowest flat tax rates in the nation.
This tax bill also repealed the utility receipts tax, which is a gross receipts tax levied on utility companies. Repealing this tax does not directly benefit individuals, but because the General Assembly requires utility companies to pass those savings through to consumers, individuals should see a slight reduction in utility bills going forward.
Modifications to Compliance Standards
In addition to tax cuts, legislators sought to make tax compliance a bit easier. First, on the income tax front, legislators codified a long-standing Indiana Department of Revenue (DOR) policy allowing pass through entities to elect to refund their Economic Development for a Growing Economy (EDGE) credits directly to the entity.
From a sales tax perspective, effective July of this year, not-for-profits will have an easier time making exempt purchases – at least in theory. Senate Bill 382 requires not-for-profits to apply for a specific sales tax exemption certificate issued and controlled by the DOR, which makes it less likely that vendors will question a not-for-profit’s exemption.
Though this change appears to make the process easier for both the purchaser and the seller, one change that could make compliance difficult is the requirement for not-for-profit organizations to apply for this certificate within 120 days of formation and file reports with the DOR every five years. Not-for-profits failing to timely comply with these new requirements risk losing their exempt status, and, right now, it is unclear what the process will be to come back into compliance.
Other Tax Law Changes
A few other notable changes from this year’s session:
- For sales tax nexus purposes, Indiana changed its definition of retail transactions to include wholesale purchases. This will mean that out-of-state sellers will more quickly reach the sales threshold to establishing economic nexus in Indiana, requiring them to collect and remit sales taxes within the state.
- Beginning next year, newly constructed big box stores will be required to use the cost approach to determine their property tax value. Assessors will use pre-established standards to value property based on cost per square foot. After the first five years (or after the original occupant vacates the property), retailers can begin using sales or income to determine tax values.
- Churches and religious societies are given a reprieve from personal property tax filings. These organizations can stop filing personal property tax returns if they’ve filed at least five consecutive returns that show zero tax liability.
Bills That Didn’t Have Enough Support
While many of the tax law changes we thought would pass remained on the statehouse floor, it’s possible – perhaps even likely – that these bills will make a reappearance in future sessions, so it’s good to keep them in mind.
- Sales Tax on Services: The Senate introduced a bill, as it has done for many years running, that would assess sales tax on nearly all services. Even though this sweeping tax law would have likely been coupled with a rate reduction, it proved unpopular in the Senate and didn’t advance beyond its first reading.
- Repeal of Business Personal Property Tax: There was brief discussion of completely repealing personal property tax for businesses, or, at the very least, removing or reducing the 30% minimum tax on equipment purchases. Lawmakers argued that these changes could reduce tax burdens on businesses and free up valuable capital that they could spend elsewhere, but none of the bills that included this language advanced in this year’s hearings.
- Single-Direct Test for Manufacturing Exemptions: Lawmakers proposed a new provision that would reduce sales tax burdens on manufacturers. Currently, Indiana uses a double-direct test to determine when purchases should be exempt from sales tax. Under a double-direct standard, the state will only exempt manufacturers’ purchases when they are directly used in the direct production of a product. Unfortunately, this provision was removed from House Bill 1002 before it was signed.
Looking to the Future
Even if the 2022 Indiana legislative session wasn’t what we had hoped, we can use this year’s session as a marker for what’s to come. If legislators revive some of these failed bills during next year’s budget session, they may have a better chance at making it to the governor’s desk in 2023.
Below is a complete list of the legislative changes that got passed this year. Reach out to your KSM advisor to see how these changes could affect your strategic plans for 2022 and beyond.
|Individual Income Tax Rate: The current income tax rate for individual taxpayers is 3.23%. Beginning with tax years starting after Dec. 31, 2022 (i.e., calendar year 2023), the individual income tax rate will be reduced as follows if certain state revenue thresholds are met and the Indiana Public Retirement System maintains a balance to pay its liabilities without additional appropriations.
|Automatic Refunds: Due to the state budget surplus, Indiana will be issuing $125 automatic taxpayer refunds (ATR) to eligible taxpayers. Eligible taxpayers include anyone who filed a 2020 tax year resident return prior to Jan. 3, 2022. Unlike previous years, the ATR will not be issued to eligible taxpayers via the 2021 Indiana income tax return. It is expected that the refunds will begin being issued in late April 2022.|
|EDGE Credit: New rules have been issued outlining EDGE credit application guidelines for companies increasing jobs in Indiana without also proposing a physical location. An applicant must propose a minimum of 50 net new jobs and pay an average hourly wage of 150% of the state’s average wage in order to be eligible in this scenario.
Effective for the 2022 tax year, a new election was created allowing pass through entities to have their qualified EDGE credits paid directly to the entity without having to offset any amount of tax. This codifies the DOR’s long-standing policy to allow S corporations and partnerships to directly receive the benefit of the credit. The election is required to be made by the original due date of the electing entity’s tax return, without regard to extensions.
Further guidance is expected from both the DOR and the Indiana Economic Development Corp. (IEDC) regarding specific procedures and mechanics of the election. In addition to the election, Indiana law now specifically includes EDGE credit refunds in Indiana taxable income and includes these EDGE credit refunds in a multistate taxpayer’s apportionment factor. Administratively, by allowing the DOR to directly issue EDGE refund payments, the DOR is entitled to be a part of the clawback process for any EDGE credit payments made under this election.
|529 Plan Credit: Indiana will continue to offer a credit up to 20% of the contributions to a qualified 529 education plan. For tax years beginning after Dec. 31, 2022, the maximum credit available has been raised to $1,500, or $750 for married individuals filing separate returns. This means that contributions up to $7,500 qualify for the nonrefundable Indiana credit.|
|Partnership Audit Rules Technical: Effective retroactively to July 1, 2021, technical corrections were made to various sections dealing with partnership audit and administrative adjustments. This chapter was added during the 2021 legislative session to provide Indiana guidance as a result of the federal centralized partnership audit regime. The technical corrections updated definitions as well as added clarifications regarding taxpayer-initiated adjustments.|
|Not-for-Profit Sales Tax Exemption: Effective July 1, 2022, significant changes are coming to the way not-for-profit organizations are able to purchase and sell taxable items exempt from sales tax. Within 120 days of formation, a non-profit shall apply for a sales tax exemption from the DOR. Once approved, the department will issue an official electronic sales tax exemption form that the not-for-profit can use to purchase exempt items from vendors. Vendors will have more security in accepting an official department-issued exemption certificate from the not-for-profit organizations.
In exchange for the department-issued exemption certificate, the not-for-profit will be required to file a report with the department every five years. If the not-for-profit fails to file the report after being notified by the department, it will risk losing its sales tax-exempt status and may not be able to regain it until it goes through the department’s ordinary appeal process. Changes also include a schedule by which existing not-for-profit organizations are required to file their first and second reports depending on its federal employer identification number.
In addition, there are significant changes to how not-for-profit organizations may make exempt sales of taxable items. Prior to July 1, 2022, sales by a not-for-profit may be exempt if the not-for-profit is engaged in selling activity in 30 days or fewer in a calendar year. Effective July 1, 2022, sales of taxable items by a not-for-profit are exempt if the organization does not make more than $20,000 dollars in sales in a single calendar year. Once a not-for-profit’s sales reach $20,000, it is required to begin collecting and remitting sales tax for its sales for the remaining part of the calendar year. This change may not affect organizations with large fundraising goals or functions, but it will benefit smaller not-for-profits whose total sales do not hit the $20,000 limit. Additional guidance on how to apply the new sales-based rules is expected from the department.
|Aircraft Purchased to Lease: Effective July 1, 2022, the revenue threshold calculation for the sales tax exemption for the purchase of aircraft will change. The rental or leasing of an aircraft during the ordinary course of a person’s business is not exempt from state gross retail tax unless the person establishes that the annual amount of the gross lease revenue derived from leasing the aircraft is equal to or greater than 7.5% of the book value of the aircraft or the net acquisition price of the aircraft, which shall include the value of any trade or exchange and excluding any sales commissions paid to third parties. Prior to this change, the net acquisition price did not specifically include the trade in value nor exclude the sales commissions paid to third parties.|
|Retail Transaction Definition: Effective July 1, 2022, the definition of retail transaction includes wholesale transactions. While not making a significant change to existing law and policy, it underscores that Indiana’s sales tax economic nexus threshold may be met even if the out of state seller with no physical presence only sells to Indiana customers for resale.|
|Utility Receipts Tax: The utility receipts tax, a tax paid by utility companies, is repealed as of July 1, 2022. Utilities are required to make a rate adjustment to reflect the repeal of the utility receipts tax. In effect, the General Assembly has ordered utilities to pass the savings resulting from the repeal of the utility receipts tax on to rate payers.|
|Excise Tax on Vaping Supplies Rate: The excise tax on vaping supplies has been reduced to 15%.|
|Homestead Exemption and Over 65 Maximum Assessed Valuation: For property tax assessments beginning Jan. 1, 2023, the mortgage deduction has been repealed however the homestead deduction has been increased from $45,000 to $48,000. Additionally, for individuals 65 and older who meet other qualifications to receive an additional deduction, the maximum assessed value of the eligible real property increased from $200,000 to $240,000 effective for taxable years beginning after Dec. 31, 2022.|
|Big Box Stores and Self-Storage Facility Valuations: Effective Jan. 1, 2023, “big box stores” will see changes in the method used to determine true tax value. The true tax value of commercial real property with a structure that is at least 100,000 square feet in area, is used for retail purposes, is occupied by a single retailer, and is assessed for the first time after Dec. 31, 2022, shall be determined by application of the cost approach for the first five years after construction. The Department of Local Government Finance will establish standard construction cost per square foot to be used in the valuations made by county assessors. Sales comparison or income capitalization approaches will not be allowed in setting the value for the first five years of the new structure. If the property was vacated by the original occupant within the first five years, the property does not have to be valued by this new cost approach. Additionally, if the property is substantially and adversely impacted by a change in a roadway or traffic patterns, the new cost approach does not apply.
Additionally, effective for assessment dates after Dec. 31, 2022, the assessed value of self-storage facilities will be determined by the lowest of the three appraisal valuation techniques: income approach, sales comparison approach, or the cost approach.
|New Indiana Board of Tax Review Powers: If a real property assessment is increased greater than 5%, Indiana Board of Tax Review is now required to determine the true tax value of the real property by weighing the evidence presented during the hearing. The board’s determination of the property’s assessed value may be higher or lower than the assessed value proposed by either party, but if the evidence presented to the Board is insufficient to determine the property’s assessed value, then the assessment will revert to the prior year assessed value. This is effective for future appeals.|
|Business Personal Property Tax Returns for Exempt Businesses and Churches/Religious Societies: Effective Jan. 1, 2023, business personal property tax return filing requirements have changed for certain for filers. A church or religious society is not required to file a personal property tax return once business personal property returns have been filed for five years and no personal property tax has been owed. If there is a change in ownership of any personal property included on a return or any other changes resulting in the personal property no longer being eligible for exemption, then a personal property tax return must be filed.
Additionally, any taxpayer who qualifies for the less than $80,000 small business exemption, filed a business personal property tax return electing the exemption, and was approved does not need to file another personal property tax return unless their exempt status changes. Additional guidance is needed to clarify when this relief will become effective.
|Innovation Development Districts: Effective July 1, 2022, and through June 30, 2025, the IEDC may collaborate with a community executive to designate a territory within a city, town, or county as an Innovation Development District (IDD). All incremental taxes, including property taxes, sales taxes, and income taxes, that are generated by a business locating in an IDD go into an IDD fund.
The IDD fund will be administered by the IEDC and can be used to provide grants, loans, or investments for acquisition and improvement of land or other property; for costs associated with creating local innovation development districts; for development of partnerships, including grants and loans, between the state, advanced industry, and higher education institutions focused on development, expansions, or retention in the state; for stimulation of investments in entrepreneurial or high growth potential companies; or for workforce training assistance.
A minimum of 12% of the aggregate percentage of annual incremental property tax revenue must be transferred to the respective city, town, county, school corporation on an annual basis.
KSM’s State & Local Tax Group follows all activity by the Indiana General Assembly and keeps detailed records of even minor law changes. Thus, if you have questions about how these or other pieces of legislation might affect your business, please contact your KSM advisor or fill out this form.
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