1 October 2014 District of Columbia Reduced Tax Rates, Single Sales Factor, Other Changes Adopted Permanent District of Columbia budget legislation makes numerous significant changes to the corporation franchise tax, the unincorporated franchise tax, and the personal income tax, including (1) reducing tax rates, (2) adopting a single sales factor for apportionment purposes, (3) incorporating market-based sourcing, and (4) adding credits for alternative fuel infrastructure and alternative fuel vehicle conversion. Tax Rates For corporation franchise tax and unincorporated franchise tax purposes, for tax years beginning after 2014, the tax rate is reduced to 9.4% from 9.975%. The rate may be lowered as far as 8.25%, depending on funding. For personal income tax purposes, for tax years beginning after 2014, the tax rates are as follows: $0 to $10,000: 4%; $10,001 to $40,000: $400 plus 6% of the excess over $10,000; $40,001 to $60,000: $2,200 plus 7% of the excess over $40,000; $60,001 to $350,000: $3,600 plus 8.5% of the excess over $60,000; $350,001 and over: $28,250 plus 8.95% of the excess over $350,000. The tax rates may be revised for tax years beginning after 2015, if funding is available. Previously, there was not a bracket for the $40,001 to $60,000 range. Single Sales Factor For tax years beginning after 2014, business income is apportioned by the sales factor alone. Through 2014, taxpayers apportion business income using a factor of property, payroll, and double-weighted sales. Combined groups also use a 100% sales factor for tax years beginning after 2014.
2 Market-Based Sales Sourcing Sales, other than sales of tangible personal property, are in the District if the taxpayer's market for the sales is in the District. The taxpayer's market for sales is in the District: in the case of sale, rental, lease, or license of real property, if and to the extent the property is located in the District; in the case of rental, lease, or license of tangible personal property, if and to the extent the property is located in the District; in the case of the sale of a service, if and to the extent the service is delivered to a location in the District; and in the case of intangible property that is rented, leased, or licensed, or sold, if and to the extent the property is used in the District. Alternative Fuel Infrastructure Credit An alternative fuel infrastructure credit may be claimed against the corporation franchise tax, the unincorporated franchise tax, and the personal income tax, beginning with tax years after 2013 through tax years ending December 31, The credit is equal to 50% of the equipment and labor costs directly attributable to the purchase and installation of alternative fuel storage and dispensing or charging equipment on a qualified alternative fuel vehicle refueling property or in a qualified private residence. For private residences, the credit is a maximum of $1,000 per vehicle charging station. For vehicle refueling property, the credit is a maximum of $10,000 per property or charging station. The costs associated with the purchase of land, the purchase of an existing property or the construction of a structure are excluded. The credit may be carried forward for two years and is not refundable. It is subject to recapture. Alternative Fuel Vehicle Conversion Credit An alternative fuel vehicle conversion credit may be claimed against the corporation franchise tax, the unincorporated franchise tax, and the personal income tax, beginning with tax years after 2013 through tax years ending December 31, The credit is equal to 50% of the equipment and labor costs directly attributable to the cost to convert a motor vehicle licensed in the District that operates on petroleum diesel or petroleum derived from gas to a motor vehicle that operates on alternative fuel. The nonrefundable credit is capped at $19,000 per vehicle. Standard Deduction, Personal Exemption Increased For personal income tax purposes, for tax years beginning after January 1, 2015, the standard deduction amounts are increased. For single individuals or married filing separate taxpayers, the standard deduction is a minimum of $5,200; for head of household taxpayers, a minimum of $6,650; and for married filing joint taxpayers or surviving spouses, a minimum of $6,650. The current amount is $4,000. The figures are indexed for inflation. The standard deduction amounts may be increased later depending on tax revenues. For personal income tax purposes, a personal exemption amount of at least $2,200 may apply (currently, $1,675), subject to the availability of funding. The personal exemption is phased out if the taxpayer s adjusted gross income exceeds $150,000. An additional exemption for head of household taxpayer is allowed before January 1,
3 Other Tax Changes Definition of unincorporated business: The definition of "unincorporated business" does not include, for tax years beginning after 2014, a trade or business that arises solely by reason of the purchase, holding, or sale of, or entering, maintaining or terminating of positions in stocks, securities, or commodities for a taxpayer s own account. Definition of sales: The definition of "sales" is clarified to exclude receipts of a taxpayer from hedging transactions and from the maturity, redemption, sales, exchange, loan or other disposition of cash or securities. Pension exclusion: The personal income tax exclusion for pension, military retired pay, annuity income or survivor benefits from the District or the federal government is only applicable to tax years beginning before January 1, Long-term care insurance deduction: The personal income tax deduction for long-term care insurance premiums, up to $500, is only available for tax years beginning before January 1, Credit for property taxes: The personal income tax credit for property taxes, for tax years beginning after 2014, for eligible senior claimants is 100% of the property tax or of rent constituting property taxes accrued over 3% of adjusted gross income. An "eligible senior claimant" is defined as someone who is 70 years or older at any time during the tax year and whose adjusted gross income does not exceed $60,000. IRS income adjustments credit: The credit that may be claimed against the corporation franchise tax, unincorporated franchise tax or the personal income tax for IRS income adjustments is applied over a three-year period in equal amounts in tax years beginning on or after January 1, Previously, the credit was applied over a four-year period in equal mounts in tax years beginning on or after January 1, Act (D.C.B ), Laws 2014, enacted September 23, 2014, effective after a 30-day congressional review period, applicable October 1, 2014 Florida Subsidiary Must Report Gain from Sale of Assets as Business Income The treatment of the sale of a subsidiary company s stock and election under IRC 338(h)(10) will be the same for Florida corporation income tax purposes as the federal income tax treatment of the transaction. In the present instance, the buyer and the taxpayer, who negotiated with an unrelated corporation to sell the stock of its whollyowned subsidiary, agreed that the subsidiary will distribute unwanted assets to the taxpayer. If the distribution is treated as a nontaxable transaction for federal income tax purposes, the distribution will be treated as a nontaxable transaction for Florida corporate income tax purposes. The subsidiary is required to report the gain from the deemed sale of its assets on its Florida corporate income tax return as business income. Technical Assistance Advisement, No. 14C1-005, Florida Department of Revenue, June 18, 2014, released October 13,
4 Illinois Sales Not Terminated at Illinois Destination A multistate parent company engaged in the manufacturing and marketing of automobile audio, lighting, and electronic systems that filed a combined Illinois corporation income and replacement tax return with its subsidiaries was not required to include sales of audio components between subsidiaries, one of which had Illinois taxable nexus, in the numerator of the sales factor of the combined group s apportionment formula. The products were shipped to and stored in the Illinois facilities of a freight forwarder for less than two days merely to accommodate further shipping to a predetermined destination in another country. Therefore, the shipment of the products did not terminate in Illinois. The taxpayer also was not engaged in a warehouse function in Illinois. Accordingly, the sales were not sales in the state. Private Letter Ruling, IT PLR, Illinois Department of Revenue, April 24, 2014, released September 23, 2014 Credit for Taxes Paid on Distributable Pass-Through Entity Income Denied A resident taxpayer was not entitled to claim a credit against Illinois personal income tax liability for taxes paid to another state on wages that the other state recharacterized as distributable income from a pass-through entity that the taxpayer was required to apportion to the state. Since the taxpayer s base of operations for his employment was Illinois, all of his compensation received from the pass-through entity was allocable to Illinois. In addition, the pass-through entity reported on his Form W-2 that all of his employee compensation was sourced to Illinois. Therefore, the taxpayer was not allowed to include any of the employment compensation from the pass-through entity in determining his maximum allowable credit for taxes paid to another state. General Information Letter IT GIL, Illinois Department of Revenue, February 13, 2014, released September 23, 2014 Federal Treatment of Passive Activity Losses Followed A nonresident who has incurred pass activity losses must file a personal income tax return if the taxpayer incurs Illinois income tax liability. The starting point in calculating Illinois base income is the taxpayer's federal adjusted gross income, which is modified by certain Illinois addition and subtraction adjustments. Illinois income tax law contains no modifications with respect to deductions disallowed under the passive activity rules of IRC 469. Illinois income tax law also does not otherwise provide its own limitations on passive activity losses attributable to Illinois activities. Therefore, passive activity deductions are allowed for Illinois purposes to the extent they are allowed for federal income tax purposes. Passive activity deductions disallowed for federal income tax purposes are likewise disallowed for Illinois income tax purposes. If the passive activity losses are derived from an Illinois trade or business, the losses must be apportioned to Illinois according to the single sales factor apportionment formula. General Information Letter IT GIL, Illinois Department of Revenue, August 19, 2014, released September 23, 2014 Withholding Required for Nonbusiness Partnership Income Effective for tax years ending on or after December 31, 2014, personal income tax withholding is required for the share of nonbusiness income of a partnership that is allocated to Illinois, whether or not such income is distributed. The option for filing composite returns for partnerships is also eliminated for tax years ending on or 4
5 after December 31, The amount withheld and paid to the Illinois Department of Revenue will be treated as a payment of the estimated tax liability of the partners. Any partner with sufficient withholding from the partnership to satisfy their income tax liability will not have to file an Illinois return. Nonresident partners may have an obligation to file an Illinois return if they have insufficient withholding, other Illinois sourced income or are seeking a refund. In that case, those partners can report the amounts withheld as a credit against their liability for taxes on the pass-through income. General Information Letter IT GIL, Illinois Department of Revenue, September 23, 2014, released October 7, 2014 Michigan Flow-Through Entity Withholding Requirements Revised A Michigan flow-through entity is not required to comply with the income tax withholding requirements to the extent that the withholding would violate: distribution restrictions for housing assistance payment programs; rural housing service return on investment restrictions; or articles of incorporation or other documents of organization adopted pursuant to the state Housing Development Authority Act. Act 295 (S.B. 473), Laws 2014, effective September 30, 2014 Certain Trust Transfers Excluded from SEV Increase Michigan has enacted legislation regarding limits on property tax increases that expands the types of transfers that are not subject to an increase to the state equalized value (SEV). Generally, the taxable value of a property cannot increase annually by more than the rate of inflation or 5%, whichever is less. However, a transfer of ownership can trigger an increase of up to 50% of the market value, which is referred to as the SEV. The legislation expands the types of residential real property transfers that are not subject to the 50% increase to include transfers to a trust, distributions from a trust, changes in sole present beneficiary of property from a trust, and distributions under a will or by intestate succession. To qualify, the beneficiary must be a certain close family member of the settlor and the use of the use of the property must not change. H.B. 5552, Laws 2014, effective October 9, 2014 Former SBT Was Excise Tax Affirming the Tax Tribunal, the Michigan Court of Appeals concluded that the former single business tax (SBT) was an excise tax. Under the applicable bankruptcy law, excise taxes cannot be discharged. The taxpayer argued that an excise tax was a specific indirect tax, imposed on a transaction from general business taxes and consequently that the former SBT was not an excise tax. On the other hand, the Department of Treasury argued that an excise tax was properly characterized as a privilege tax imposed on a corporation for engaging in business activity in the state and that the former SBT was an excise tax. The court reasoned that the former SBT had the characteristics of an excise tax as defined under the federal bankruptcy law. Accordingly, the definition of an excise tax was an assessment that taxes the "enjoyment of a privilege" or "the carrying on of an occupation or activity," both of which described the purposes of the former SBT. As such, the former SBT was a nondischargeable excise tax. 5
6 Henderson v. Department of Treasury, Michigan Court of Appeals, No , September 25, 2014 Missouri Trade Show Displays Sold to Out-of-State Customers Subject to Sales Tax, Not Use Tax The Missouri Administrative Hearing Commission (AHC) held that a Missouri corporation that was in the business of designing and constructing exhibits for trade shows was liable for Missouri sales tax on its sales of displays to its customers that were delivered by common carrier to out-of-state addresses. The AHC held that title to the displays passed when they were put into the hands of a common carrier at the taxpayer s loading dock in Missouri, and the transactions at issue were subject to sales tax. Since the transactions at issue were subject to sales tax, no use tax was due. However, the AHC discussed the Director of Revenue s use tax assessments. The taxpayer warehoused the displays of most of its customers after returning from the trade show or exhibit hall, which suggested that most customers did not have the desire or space to dedicate to storage. Providing temporary storage did not substantially change the nature of the taxpayer s business. The AHC agreed with the taxpayer that the director stretched the meaning of , RSMo, too far in an effort to make the case that the taxpayer was liable for use tax on the storage of displays if it was not liable for sales tax. The taxpayer was not a vendor making a sale of tangible personal property for the purpose of storage, use or consumption in Missouri. It sold the displays at retail in Missouri for customers to buy and use as they deemed appropriate. To the extent that the taxpayer s customers paid for storage of the displays, they paid pursuant to separate agreements that were not part of the record, and, presumably, they paid separate amounts for that service. VisionStream, Inc. v. Director of Revenue, Administrative Hearing Commission (Missouri), No RS, August 26, 2014, released September 2014 If you have any questions, please contact your tax advisor or: Curtis Ruppal Mike Merkel , Ext , Ext Bob Woolley Ron Cook , Ext , Ext 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 CCH. All Rights Reserved 6