Adjusted Factor-Based Nexus Thresholds Announced, Other Matters Discussed

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1 January 2013 California FTB Contacting Nonfilers The California Franchise Tax Board (FTB) is contacting more than 1 million people who did not file a 2011 state income tax return. The deadline to file was October 15, The FTB compares its records of filed tax returns with the more than 400 million income records it receives each year from the Internal Revenue Service, banks, employers, state departments, and other sources. The FTB also uses occupational licenses and mortgage interest payment information to detect others who may have a requirement to file a state tax return. Contacted individuals have 30 days to file a state tax return or show why one is not due. If a required return is not filed, the FTB will issue a tax assessment using income records to estimate the amount of state tax due. The assessment will include interest, fees, and penalties. Individuals can request more time to respond, retrieve information that can assist in filing a tax return, request tax forms, learn about payment options, sign up to receive an reminder to file, and access other services on the FTB s website at They can also call the FTB at to get information. News Release, California Franchise Tax Board, January 16, 2013 Adjusted Factor-Based Nexus Thresholds Announced, Other Matters Discussed In the January 2013 issue of Tax News, the California Franchise Tax Board (FTB) announced the inflation-adjusted property, payroll, and sales factor nexus thresholds for determining whether a multistate corporation is doing business in California and must file a corporation franchise tax return. Effective for tax years beginning on or after January 1, 2012, the property factor threshold is increased from $50,000 to $50,950, the payroll factor from $50,000 to $50,950, and the sales factor from $500,000 to $509,500. The taxpayer s pro rata share of sales, property, and payroll from partnerships, LLCs treated as partnerships, and S corporations must be included when determining the amount of the taxpayer s sales, property, and payroll for doing business purposes. 1

2 A variety of other corporation franchise and personal income tax topics are covered in the newsletter, including: fraud prevention techniques for individual income tax preparers; undelivered tax refunds; recent updates to the FTB s information directory (FTB 1240); an upcoming free webinar on filing tips for new business owners; the first in a series of articles on common audit issues for both individual and business entity taxpayers; changes to the power of attorney form, FTB 3520; the taxpayers bill of rights annual report to the Legislature and hearing update; and Proposition 39 that repealed the annual single sales factor apportionment election for multistate taxpayers computing corporation franchise tax liability and made the use of single sales factor apportionment mandatory for all but those taxpayers required to use equalweighted, three-factor apportionment. Tax News, California Franchise Tax Board, January 2013 Illinois Compensation Paid to Employee for Services in Illinois Taxable by Illinois The Illinois Department of Revenue issued a personal income tax general information letter stating that deferred compensation received by a nonresident for past services performed in Illinois is subject to withholding tax. The amounts paid to the nonresident were reported on federal Form W-2. Illinois withholding is required with respect to any item of compensation paid in Illinois for which federal withholding is required. Further, where compensation is paid to a nonresident for past services, such compensation will be presumed to have been earned ratably over the employee's last five years of service with the employer, for the purpose of determining whether and to what extent such compensation is paid in Illinois and is allocated to Illinois. Compensation for past services performed solely within Illinois is allocable to Illinois. General Information Letter IT GIL, Illinois Department of Revenue, November 13, 2012 Transfer of Car to Stepchild Subject to Private Vehicle Use Tax The Illinois Department of Revenue has issued a general information letter stating that a taxpayer was liable for the standard Illinois private vehicle use tax on the transfer of a car to his stepson because the lower tax rate applicable to transfers to a child does not extend to stepchildren. The department notes that the prior letter sent to the taxpayer is rescinded. General Information Letter ST GIL, Illinois Department of Revenue, December 7, 2012 Car Finance Company Not Entitled to Tax Refund A finance company for car dealerships was not entitled to a refund of sales tax paid on car purchases financed by the company because a person claiming a sales tax credit or refund must be the retailer who paid sales tax regarding the sale. The finance company did not sell any of the cars for which it claimed a sales tax refund and did not remit sales taxes. The company sought a sales tax refund on car purchases it financed for which it later sought a federal tax bad debt deduction. A retailer is entitled to obtain a refund of sales tax, and a purchaser is entitled to a refund of use tax, if it is shown that the tax was paid but not due. The retailer must pay back to the purchaser any use tax that was paid in error. The company did not show that it paid back the purchasers any amount of the use tax due. 2

3 Further, the company did not submit the required detailed information on the claim of refund form, including facts and information to show that a credit was due in the amount claimed. Administrative Hearing Decision No. ST 12-13, Illinois Department of Revenue, October 19, 2012, released December 2012 Aircraft Transfer Subject to Aircraft Use Tax Illinois aircraft use tax liability is imposed on the transfer of an aircraft from individual owners to a newly formed corporation because the aircraft is being transferred from one legal entity to another. Aircraft use tax is incurred on aircraft acquired by gift, transfer, or non-retail purchase. The transfer is taxable even though the beneficial ownership of the aircraft will not change after the transfer. General Information Letter ST GIL, Illinois Department of Revenue, December 20, 2012 Provision of Services With Transfer of Property Discussed The Illinois Department of Revenue has issued a general information letter stating that if a company provides services with the transfer of tangible personal property, such as medical records delivered to a customer in a hard copy version rather than electronically, the transaction is generally taxable under one of the four methods under which a serviceman s liability is determined. The letter discusses the four methods of determining a serviceman s liability. The department notes that it does not consider the viewing, downloading, or electronic transmitting of video, text, and other data over the Internet to be the transfer of tangible personal property. General Information Letter ST GIL, Illinois Department of Revenue, November 29, 2012 Michigan Exception Made for Transfer of Residential Property to Close Relatives For purposes of determining the taxable value of property for local Michigan property tax purposes, an additional exception to a transfer of ownership will be made for the transfer of residential real property to close relatives. Beginning December 31, 2013, a transfer of ownership will not include a transfer of residential real property if the transferee is related to the transferor by blood or affinity to the first degree and the use of the residential real property does not change following the transfer. "Residential real property" is property classified as residential real property under c, M.C.L. Act 497 (H.B. 4753), Laws 2012, effective December 28, 2012, applicable as noted Principal Residence Exemption Provisions Revised Legislation has been enacted that revises the provisions under which a bank, land contract vendor, credit union, or other lending institution may retain the local Michigan property tax principal residence exemption on foreclosed property. The legislation does the following: it extends the provisions to property that a bank, land contract vendor, credit union, or other lending institution owns as a result of forfeiture of a recorded interest or through deed or conveyance in lieu of a foreclosure or forfeiture; it provides that a bank, land contract vendor, credit union, or other lending institution retains the exemption at the same percentage of exemption that the property previously had; it allows the property to be occupied by the person who claimed the exemption immediately before the foreclosure or forfeiture; it specifies that the bank, land contract vendor, credit union, or other lending institution may retain the exemption for not more than three years; and 3

4 it specifies that the amount the bank must pay that is equal to the school operating taxes that otherwise would be collected is an amount that is not captured by any authority as tax increment revenues. Act 524 (H.B. 4446), Laws 2012, effective December 28, 2012 Property Affixed to Out-of-State Real Estate Exempt A Michigan use tax exemption is added for property purchased or manufactured by a taxpayer constructing, altering, repairing, or improving real estate if the property is affixed to and made a structural part of real estate located in another state. The exemption does not depend on whether sales or use tax was due and paid in the state in which the real estate is located. The definition of "industrial processing" is also amended to include activity relating to property affixed to real estate located in another state. Such property would be eligible for the industrial processing exemption. The legislation also removes statutory references to "one-way paging service" to conform to the Streamlined Sales and Use Tax Agreement (SST) and to clarify that paging service is not excluded from tax. Act 474 (H.B. 5937), Laws 2012, effective December 27, 2012, applicable retroactively to January 1, 2006 Exemption Enacted for Property Used in Nonprofit Fund-Raising Activities The Michigan sales tax exemption for tangible personal property purchased by a nonprofit organization for carrying out the purpose of the organization has been extended to include property used to raise funds or obtain resources required to carry out the organization s purpose. The exemption for any single item of tangible personal property or vehicle used to raise funds is limited to a sales price not exceeding $5,000. In place of submitting the exemption letter ruling signed by the administrator of the Sales, Use, and Withholding Taxes Division, a nonprofit taxpayer may present a signed statement advising that the property is to be used in connection with the operation of the organization, to carry out the purpose of the organization, or to raise funds or obtain resources for the organization. The statement should also express that the organization qualifies as an exempt organization under MCL q and that the sales price of any single item of property or vehicle purchased for fund-raising purposes does not exceed $5,000. A copy of the federal exemption letter is not required if the organization is exempt from filing an application for exempt status with the IRS. Act 573 (S.B. 1337), Laws 2012, effective 91 days following adjournment of 2012 legislative session 4

5 Pension Benefits Deduction Revised The amount of retirement or pension benefits that can be deducted under the Michigan personal income tax is revised, based on the taxpayer s age, for taxpayers receiving the benefits from employment with a government agency not covered by the federal Social Security Act. Beginning January 1, 2013, for a person born in 1946 through 1952 who receives retirement or pension benefits from employment with a government agency not covered by the federal Social Security Act, the deduction for public retirement or pension benefits is limited to $35,000 for single returns or $55,000 for joint returns. If both spouses receive such public retirement or pension benefits, the deduction is increased to $70,000 for joint returns. After the taxpayer reaches age 67, this deduction does not apply. Instead, the taxpayer is eligible for a deduction of $35,000 for single returns or $55,000 for joint returns (or $70,000 for joint returns, if applicable); this deduction is available against all types of income. However, the deduction against all types of income is not available for persons who claimed the deduction of compensation for services in the U.S. Armed Forces, Railroad Retirement Act benefits or pension benefits from Michigan National Guard services. For a person born after 1952 who has reached age 62 through 66 and who receives retirement or pension benefits from employment with a government agency not covered by the federal Social Security Act, the deduction for public retirement or pension benefits is limited to $15,000 for a single return or $15,000 for a joint return. However, if both spouses receive such income, then the deduction is $30,000 for a joint return. Michigan personal income taxpayers are permitted to deduct, to the extent included in adjusted gross income, retirement or pension benefits received for services in the Michigan National Guard. Previously, retirement or pension benefits received for services in the Michigan National Guard were not deductible. The law also deletes language regarding "total household resources" that was added to reduce the personal exemption and certain deduction amounts for higher-income taxpayers. As previously reported, the Michigan Supreme Court held that this language violated the state constitution by creating a graduated income tax. Act 597 (S.B. 409), Laws 2013, effective January 9, 2013, applicable January 1, 2012 Ohio New Tax Imposed on Financial Institutions in 2014 Recently passed legislation imposes a new tax on financial institutions, effective January 1, The legislation also eliminates the existing dealers in intangibles tax and imposes the existing commercial activities tax (CAT) on dealers in intangibles except dealers that are small dollar lenders or affiliates of financial institutions; small dollar lenders and most dealers affiliated with financial institutions will become subject to the new tax. H.B. 510, Laws 2012, effective 90 days after filing with the Secretary of State, applicable as noted; Bill Analysis, Ohio Legislative Service Commission New Financial Institution Tax Replaces Corporate Franchise, Dealers in Intangibles Taxes Beginning With Tax Year 2014 A recently enacted Ohio bill (H.B. 510) replaces the corporate franchise and dealers in intangibles taxes on financial institutions and dealers in intangibles with a new business privilege tax on financial institutions, beginning with tax year Both the corporate franchise tax and the dealers in intangibles tax are repealed at the end of

6 The legislation imposes the commercial activities tax (CAT) on dealers in intangibles except dealers that are "small dollar lenders" or affiliates of financial institutions, both of which will be subject to the new financial institutions tax (FIT). "Small dollar lender" is defined as any person engaged primarily in the business of loaning money to individuals, provided that the loan amounts do not exceed $5,000 and the duration of the loans does not exceed 12 months. Bank organizations, credit unions, and captive finance companies are excluded from this definition. The FIT will be levied on financial organizations that are organized for profit and doing business in Ohio or that otherwise have nexus in or with Ohio under the U.S. Constitution. "Financial institution" is defined as: bank organizations; holding companies of a bank organization, except for diversified savings and loan holding companies and unitary grandfathered savings and loan holding companies; or nonbank financial organizations, which includes every person that is not a bank organization or a holding company of a bank organization and that engages in business primarily as a small dollar lender. The legislation exempts a financial institution's noncontrolling minority interests in other companies from the FIT base unless the interest is in a bank or bank holding company subject to the FIT. Captive finance companies are also exempt from the new tax. Exempted entities, such as credit unions and other entities that do not qualify as financial institutions, will be subject to the CAT. The FIT will be levied on the total Ohio equity capital of financial institutions in proportion to the taxpayer's gross receipts sitused in Ohio. Situs will be based on either where a taxpayer's customers are deemed to benefit from the taxpayer's services or where the taxpayer's regular places of business are located. Rate The tax rate will be 0.8% on the first $200 million in apportioned total equity capital, 0.4% for each dollar of apportioned equity capital greater than $200 million and less than or equal to $1.3 billion, and 0.25% on apportioned total equity capital in excess of $1.3 billion. The rates are subject to adjustment after the first and third year if the revenue generated by those rates exceeds or falls below 10% of the target revenue of $200 million for 2014 or 1.06% of any adjusted amount for Also, there is a minimum tax of $1,000. Apportionment The apportionment factor that will be used to determine the total Ohio equity capital of a financial institution will be based upon the gross receipts generated by the financial institution. The apportionment factor will be a fraction, the numerator of which will be the total gross receipts of the financial institution in Ohio during the taxable year and the denominator of which will be the total gross receipts of the financial institution everywhere during the taxable year. Gross receipts generated by a financial institution will be sitused to Ohio in the proportion that the customers' benefit in Ohio with respect to the services received bears to the customers' benefit everywhere with respect to the services received. The physical location where the customer ultimately uses or receives the benefit of what was received will be paramount in determining the proportion of the benefit in Ohio to the benefit everywhere. The method of calculating gross receipts for purposes of the denominator will be the same as the method used in determining gross receipts for purposes of the numerator. The legislation allows a temporary reduction from a financial institution's total equity capital for the 6

7 institution's investment in an Ohio-qualified real estate investment trust. A real estate investment trust is "Ohio-qualified" if it is currently, and was on January 1, 2012, traded on a public stock exchange. When computing its total equity capital a financial institution may deduct: for tax year 2014, 80% of the institution's investment in an Ohio-qualified real estate investment trust as of January 1, 2012; for tax year 2015, 60% of the institution's investment in an Ohio-qualified real estate investment trust as of January 1, 2012; for tax year 2016, 40% of the institution's investment in an Ohio-qualified real estate investment trust as of January 1, 2012; and for tax year 2017, 20% of the institution's investment in an Ohio-qualified real estate investment trust as of January 1, H.B. 510, Laws 2012, effective March 27, 2013 Professional Employer Organization Provisions Enacted Ohio Gov. John R. Kasich has signed legislation that enacts a new professional employer organization (PEO) law provision relating to the treatment of corporate and personal income tax credits, sales tax, and other taxes for PEOs, their client employers, and shared employees. In addition, an income tax provision has been amended to add reporting requirements for PEOs and PEO reporting entities. Professional Employer Organization Law For purposes of determining tax credits and other economic incentives that are provided by Ohio or any political subdivision and are based on employment, shared employees under a PEO agreement are considered employees solely of the client employer. A client employer is entitled to the benefit of any tax credit, economic incentive, or similar benefit arising as the result of the client employer's employment of shared employees. If the grant or amount of any tax credit, economic incentive, or other benefit is based on number of employees, each client employer must be treated as employing only those shared employees that are co-employed by the client employer. Shared employees working for other client employers of the PEO must not be counted as employees for that purpose. Upon request by a client employer or an Ohio agency or department, a PEO must provide employment information that is reasonably required by the agency or department responsible for administration of the tax credit or economic incentive and necessary to support any request, claim, application, or other action by a client employer seeking the tax credit or economic incentive. Shared employees whose services are subject to sales tax are considered the employees of the client employer for purposes of collecting and levying sales tax on the services performed by the shared employee. A client employer or PEO will not be relieved of any sales tax liability with respect to its goods or services. For purposes of computing any tax that is imposed or calculated upon the basis of total payroll, a PEO is eligible to use any small business allowance or exemption based solely on the employees of the PEO who are not shared employees with any client employer. The eligibility of a client employer for the allowance or exemption is based solely on the payroll of the employees of the client employer, including any shared employees co-employed by the client employer. Any tax assessed on a per capita or per-employee basis will be assessed against the client employer for shared employees and against the PEO for employees of the PEO who are not shared employees co-employed with a client employer. 7

8 Income Tax Reporting Requirements Initial report: PEOs and PEO reporting entities must file a report with the Tax Commissioner within 30 days after commencing business in Ohio or within 30 days after the effective date of this law change, whichever is later. The report must include the following information: the name, address, number the employer receives from the Secretary of State to do business in this state, if applicable, and federal employer identification number of each client employer of the PEO or PEO reporting entity; the date that each client employer became a client of the PEO or PEO reporting entity; and the names and mailing addresses of the chief executive officer and the chief financial officer of each client employer for taxation of the client employer. Updated reports: Beginning with the calendar quarter ending after a PEO or PEO reporting entity files the report, and every calendar quarter thereafter, the PEO or PEO reporting entity must file an updated report with the Tax Commissioner no later than the last day of the month following the end of the calendar quarter. The following information must be included in the updated report: If an entity became a client employer of the PEO or PEO reporting entity at any time during the calendar quarter, the updated report must include all of the information required in the initial report described above for each new client employer. If an entity terminated the PEO agreement between the PEO or PEO reporting entity and the entity at any time during the calendar quarter, the updated report must include the name, address, number the employer receives from the Secretary of State to do business in this state, if applicable, and federal employer identification number of each client employer of the PEO or PEO reporting entity; the date during the calendar quarter that the entity ceased being a client of the PEO or PEO reporting entity, if applicable; or the date the entity ceased business operations in Ohio, if applicable. If the name or mailing address of the chief executive officer or the chief financial officer of a client employer has changed since the PEO or PEO reporting entity previously submitted an initial report, the updated report must include the updated name or mailing address, or both, of the chief executive officer or the chief financial officer, as applicable. If none of the above events occurred during the calendar quarter, the updated report must include a statement of that fact. "PEO reporting entity" means two or more PEOs that (1) are majority-owned or commonly controlled by the same entity, parent, or controlling person and (2) satisfy reporting entity control rules as defined by the Financial Accounting Standards Board and under generally accepted accounting principles. S.B. 139, Laws 2012, effective 90 days after filing with the Secretary of State, except as noted. The information provided in this alert is only a general summary and is being distributed with the understanding that Plante Moran, PLLC is not rendering legal, tax, accounting, or other professional advice, position, or opinions on specific facts or matters and, accordingly, assumes no liability whatsoever in connection with its use. 8