Congressional Impact on State Taxes

Transcription

1 Congressional Impact on State Taxes Presentation Before the 3 rd Annual New Mexico Tax Policy Conference March 9, 2006 Joe Huddleston, Executive Director Multistate Tax Commission 1

2 Agenda Background Past Legislation Purposeful Intervention Unintended Intervention Pending Legislation Streamlined Sales and Use Tax Act (SSUTA) Business Activity Simplification Act of 2005 (H.R. 1956) Economic Development Act of 2005 Taxation of Natural Gas Pipeline Property (H.R. 1369) Federal Tax Reform 2

3 Purposeful Intervention P.L Temporary measure to restrict states from imposing net income taxes on businesses whose only activity was solicitation of orders. Imposed physical presence standard for nexus. Railroad Regulatory Reform and Revitalization Act of 1976 (4R Act) Prohibits states from imposing differential taxes on railroad property. Permitted railroads to sue in federal courts for relief rather than using state remedies. Tax Reform Act of 1986 Eliminated deductibility of state and local general sales taxes. Affected itemizing taxpayers who are residents of states with no income taxes but with general sales taxes. Internet Tax Freedom Act Prohibited states from imposing taxes on internet access, discriminatory taxes on electronic commerce, and multiple taxes on electronic commerce. Background Past Legislation Unintentional Intervention Tax Reform Act of 1969 Added Alternative Minimum Tax (AMT) to require high income individuals to pay some income tax. State and local tax deduction limited for individuals subject to subject to AMT. Number of individuals affected is expected to increase dramatically. Economic Growth and Tax Relief and Reconciliation Act of 2001 (EGTRRA) Bonus depreciation and liberalization of expensing rules of capital purchases reduced business tax revenues for state and local governments. A significant number of states which used federal net income as the base of their income tax decoupled from this provision. Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) Increased and extended bonus depreciation. Increased expensing for small businesses. 3

4 Background Past Legislation (continued) Purposeful Intervention Economic Growth and Tax Relief and Reconciliation Act of 2001 (EGTRRA) Phased out credit for state estate taxes five years prior to elimination of federal estate tax. Some states have decoupled from this provision. Mobile Telecommunications Sourcing Act (P.L ) Transactions taxes on mobile phone service sourced solely to subscribers home address or primary place of use. American Jobs Creation Act of 2004 Permitted individuals to deduct either state and local income taxes or state and local sales taxes from their federal adjusted gross income. Unintentional Intervention American Jobs Creation Act of 2004 Qualified Production Activities Income (QPAI) deduction can result in significant loss of revenue for states that do not decouple from this provision. It is also difficult for businesses to comply with this extremely complex provision. 4

5 Pending Legislation 5

6 Streamlined Sales and Use Tax Act 108 th Congress introduced H.R & S th expected to be introduced Compatible with, but different than, Streamlined Sales Tax Project (SSTP) Telecommunications simplification Vendor compensation May be a contentious issue for states U.S. Court of Claims oversight May be a contentious issue for states 18 Minimum standards Authorizes mandatory collection 6

7 Streamlined Sales and Use Tax Act Minimum Simplification Requirements include: Centralized, multistate registration system Uniform definitions of products and product-based exemptions Uniform sourcing, tax returns, refund procedures Single tax rate per taxing jurisdiction Vendors Compensation Telecommunications Simplification Adopts the SSUTA Telecommunication provisions Opposed by local government representatives 7

8 Streamlined Sales and Use Tax Act Tax Collection Requirements: Each complying state may require sales/use tax collection by sellers on remote sales sourced to the state Small Business Exception: Not Defined No impact on nexus for other tax purposes State Compliance with Minimum Simplification Requirements SST Governing Board determines state compliance Such determination is subject to review/appeal in the U.S. Court of Claims Appeals must satisfy the arbitrary/capricious standard 8

9 Business Activity Tax No taxing authority of a State shall have power to impose, assess, or collect a net income tax or other business activity tax on any person relating to such person's activities in interstate commerce unless such person has a physical presence in the State during the taxable period with respect to which the tax is imposed 9

10 Business Activity Tax 109 th Congress introduced H.R. 1956, April 28, 2005 Successor bill to H.R and H.R Expands P.L Expands federal statute to apply to all types of sales (not just sales of tangible property) Applies to all business activity taxes, Franchise taxes Business license taxes Single Business Tax (MI) and Business and Occupation Tax (WA) Gross Receipts taxes Mandates a Physical Presence Standard 10

11 Business Activity Tax Nexus Blackjack Rule Safe Harbor (no nexus) for: 21 days or less of employees (no limit as to number of employees) in the state 21 days or less of using the services of another person, unless such person performs similar functions for at least one other business entity during the taxable year 21 days or less of leasing or owning tangible personal or real property, except the following do not count toward the 21 days: Property in the state for purposes of manufacture/process Marketing or promotional materials Property that is ancillary to an activity 11

12 Cuno Decision Revives Debate Over Constitutionality of Incentives Case History DaimlerChrysler expands in-state Jeep factory, rather than building new plant in Michigan. Plaintiffs pursue national litigation strategy. Jurisdiction of Federal courts: Tax Injunction Act does not apply. Case is on appeal to U.S. Supreme Court. 12

13 Supreme Court s Discrimination Analysis State Investment Tax Credit: Unconstitutionally Discriminatory Coerces businesses already subject to Ohio tax to expand locally rather than out-of-state. Forecloses tax neutral decision-making. Municipal Property Tax Exemption: Valid Incentive No coercion no reduction of in-state tax liability. No independent collateral requirements (e.g., new jobs, other commerce). 13

14 State Tax Incentives Was Cuno a Doctrinal Aberration? U.S. Supreme Court precedents Boston Stock Exchange v. State Tax Commission (1977) Maryland v. Louisiana (1981) Bacchus Imports Co. v. Dias (1984) Westinghouse Electric Corp. v. Tully (1984) New Energy Co. v. Limbach (1988) State and lower federal court precedents Constitutional Carrot v. Unconstitutional Stick 14

15 State Tax Incentives Whither Cuno? Petition for rehearing denied by Sixth Circuit (1/18/05) Supreme Court grants review of DaimlerChrysler s and State of Ohio s petitions, does not (yet) rule on Cuno s petition The Court directed the parties to brief and argue whether the Cuno plaintiffs have standing to challenge the ITC Case will likely be heard in January/February Decision in 2006 Affirm Reverse (merits, standing) Existing uncertainties Ohio Elsewhere in 6 th Circuit (KY, MI, TN) Other states 15

16 Reviewing and Protecting Incentives In Light of Current Uncertainty Analyze and Classify Existing Incentives by Reference to Case Law Principles, Then: Consider immediate impact on tax return filings. Consider impact on financial reporting. Consider strategic options (renegotiating incentives; statutory amendments, etc.). Examine whether Economic Development Act of 2005, HR 2471/S would bless incentives. 16

17 Economic Development Act of 2005 Proposed Federal Legislation (H.R. 2471/S.1066) Economic Development Act of 2005 Congressional Authorization Congress exercises its affirmative Commerce Clause power to regulate interstate commerce Congress authorizes states to provide tax incentives for economic development Authorization extends only to tax incentives that would otherwise discriminate against interstate commerce Broad definition of tax incentive Seven limitations restrict scope of the legislation, concern regarding authorization of discriminatory state provisions 17

18 Economic Development Act of 2005 The Seven Limitations (they are not dwarfs) 1. Incentive dependent on commercial domicile; 2. Requirement to acquire/lease/license/use/provide services to property produced/manufactured in the State 3. Incentive is reduced as a direct result of an increase in out-of-state activity 4. Incentive is reduced or eliminated as a result of an increase in outof-state activity by another person not having a taxable presence in the State (think DRD) 5. Incentive results in the loss of a compensating tax system 6. Requires that other jurisdictions offer reciprocal tax benefits 7. Requires that the tax incentive earned with respect to one tax can only be used to reduce another tax that is not apportioned 18

19 Communications Tax Administrative burden SSTP has the potential to resolve this problem Discriminatory taxation Long history of industry attempts to work with government to resolve problem Most recent effort Big 7/communications industry discussions led by NGA Industry feels it has run out of options short of federal legislation 19

20 What Should Federal Legislation Do? OPTIONS Prohibit discriminatory property (both assessment methodology and rate), business, sales and use taxes and fees on communications/video service providers Measure discrimination by comparison to taxation of other businesses Permit imposition of 911 fees, universal service fees, etc if receipts go for designated purpose and not into general fund Provide access to federal court to correct the discrimination 20

21 H.R Limitation of Discriminatory Taxation of Natural Gas Pipeline Property Assess natural gas pipeline property at same rate as other commercial and industrial properties in the assessing jurisdiction, excluding other public utility property. Ratio of assessed value to true market value must exceed 5percent before relief can be granted. Pipelines can bypass state remedies and sue in federal courts. May result in significant revenue losses in some localities. Discriminates against similar public utility properties. 21

22 Federal Tax Reform Federal Tax Reform Advisory Panel issued its report to the Secretary of the Treasury on Nov. 1, Would move current system in direction of consumption taxes but still retain the hybrid nature of current system. Expansion of consolidation of savings vehicles for individuals Expensing of purchases of capital equipment for business. Interest and dividends taxed at business level. Deduction for state and local taxes eliminated. Capital income taxed at lower rate than wage income. Reduce current mortgage interest deduction (replaced with 15% credit). Plans would changes bases of state corporate and individual taxes for states that base their tax on federal tax. Both plans could increase difficulty for states if they need to raise taxes. 22

23 Federal Tax Reform Other option considered, but not recommended was modified consumption type value added tax. Businesses could deduct wages and salaries from value added base. Would have multiple rates at the personal level. Would also include personal and family exemption Interest, dividends, and capital gains would be taxed at the business level. Could make overall federal tax system less progressive Tax would be progressive at low to middle range of incomes, proportional to moderately progressive in middle income ranges, and possibly regressive at high income range because consumption declines as a proportion of income from middle income to high income. Total replacement of current federal taxes would make it difficult for states to maintain their income tax structures because they rely on federal tax bases. 23

24 Other Options to Achieve Uniformity 24

25 Options to Achieve Greater Uniformity Federal legislation yields uniformity but not necessarily good tax policy. Cooperation with state organizations can yield better policy if federal legislation is necessary or desirable: Mobile Telecommunications Sourcing Act Streamlined Sales and Use Tax MTC is a good vehicle to achieve greater uniformity State taxation of corporate income has become more uniform over the past 40 years. Examples of cooperative effort: Mobile Telecommunications Sourcing Act Streamlined Sales and Use Tax Hotel Intermediaries 25

26 Contact Information Joe Huddleston Executive Director, Multistate Tax Commission (202) , 26