Colorado Governor Signs BILLS Suspending Special Tax Breaks

On February 24th, the Governor of Colorado signed nine pieces of legislation that suspend or eliminate several special tax breaks in order to help balance the state’s budget by generating $15.6 million in revenue this fiscal year and $132.6 million next fiscal year.

According to the PRESS RELEASE, the Governor did not want to sign the nine pieces of legislation, but felt he had no choice.

Gov. Ritter signed the following bills:

1. House Bill 1189, Eliminate Sales Tax Exemption for Direct Mail
2. House Bill 1190, Suspend Industrial Fuel Sales and Use Tax Exemption
3. House Bill 1191, Eliminate Candy and Soda Sales Tax Exemption
4. House Bill 1192, Repeal Sales and Use Tax Exemption of Standardized Software
5. House Bill 1193, Sales Tax Out-of-State Retailers
6. House Bill 1194, Eliminate Non-Essential Articles Sales Tax Exemption
7. House Bill 1195, Suspend Ag Sales & Use Tax Exemption
8. House Bill 1196, Income Tax Credit Vehicles Using Alternative Fuels
9. House Bill 1199, Limit the Net Operating Loss Deduction Temporary Limit

Two additional bills are pending:

1. House Bill 1197, Reduce Conservation Easement Cap Amount
2. House Bill 1200, Limit Enterprise Zone Investment Tax Credit

Tax Increases in Colorado - Will it Spread?

As you can see, Colorado has balanced their budget by raising taxes (eliminating or suspending exemptions, etc.) and asking everyone, or atleast several groups of taxpayers to share the pain.

Based on legislative proposals being discussed around the country in several states, I think you can expect to see other states finally reach a breaking point where they are forced to raise taxes to balance their budgets as well.

Stay tuned.

For current updates, go to COLORADO.

State Depreciation Adjustments: Limitations on Sec. 179, Bonus Depreciation, Etc.

As you may be aware, most, if not all states require taxpayers to make some type of adjustment to taxable income for depreciation taken on the federal return, including Sec. 179 and/or bonus depreciation.

For example, Minnesota requires 80% of federal bonus depreciation to be added-back to taxable income. Minnesota also did not adopt the increased Sec. 179 expensing; therefore, 80% of the difference between what Minnesota allows and what is allowed for federal purposes is added-back.

Another example is Texas. Texas, recently provided guidance in its Tax Policy News regarding Sec. 179 adjustments as follows:

An Internal Revenue Code (IRC) Section 179 expense deduction is allowed for taxable entities that elect to deduct cost of goods sold (COGS) to compute their margin. Only taxable entities that sell real or tangible personal property in the ordinary course of business are eligible to deduct COGS. Allowable costs include depreciation and IRC Section 179 expense deductions that are related specifically to equipment used in the production of goods.

“Internal Revenue Code” is defined in Texas Tax Code Section 171.0001(9) as the Internal Revenue Code of 1986 in effect for the federal tax year beginning on Jan. 1, 2007, not including any changes made by federal law after that date. Therefore, for Texas franchise tax, any increase or decrease in the Section 179 expense deduction is tied to the IRC Section 179 in effect as of Jan. 1, 2007. The changes in the Section 179 expense deduction allowed by the Small Business and Work Opportunity Act of 2007 and the American Recovery and Reinvestment Act of 2009 do not apply to franchise tax reports.

Therefore, for franchise tax report year 2008, the limit is $112,000. The limit for 2009 is $115,000, for 2010 is $120,000, and for 2011 is $25,000. Again, the years as noted are the "franchise tax report year," and not the "accounting period/year." The report coming due in May of 2010 is the 2010 report year.

If you have questions about a state's depreciation adjustments please contact me at brian.strahle@bakertilly.com.

State Income Tax Nexus: Is Your Company Protected?

"P.L. 86-272" - have you heard of it?

It is the Federal Interstate Income Tax Law (P.L. 86-272) that prohibits any state from imposing a net income tax on income derived within that state from interstate commerce if the only business activity within the state is the "solicitation of orders" for tangible personal property, provided that the orders are approved and filled outside the state. (15 U.S.C. §381)

After reading that, do you see all of the criteria your company must meet in order for P.L. 86-272 to apply to your company's situation?

In order to provide some guidance or clarity, the following is a brief tutorial on P.L. 86-272.

MAIN POINTS TO CONSIDER WHEN APPLYING P.L. 86-272

1. P.L. 86-272 only applies to "income taxes" or "taxes based on income." Therefore, it does not apply to franchise taxes if they are not based on income. An example of this is Texas' Franchise Tax (Margin Tax). Also, the gross receipts tax portion of Michigan's MBT (however, P.L. 86-272 does apply to the business income tax portion of Michigan's MBT). Other examples of where P.L. 86-272 does not apply include Ohio's CAT tax and Washington's Business and Occupation (B&O) tax.
2. P.L. 86-272 does NOT apply to companies that are soliciting sales of services or other business activities that are NOT selling tangible personal property. Therefore, P.L. 86-272 does not apply to service companies/providers that are only soliciting sales in a state, whether it is via its own employees or even through the use of independent contractors.
3. P.L. 86-272 only applies to companies that are soliciting sales of tangible personal property in a state with their own employees or via independent contractors. With that said, "solicitation of sales" can be the only activity that these employees or independent contractors complete. Some "ancillary activities" are allowed, but BE CAREFUL.
4. If your company is selling tangible personal property, you can still lose the protection of P.L. 86-272 if your company performs other activities within in a state in addition to solicitation, such as installation. The use of independent contractors to perform other activities such as installation can also lead to the loss of protection under P.L. 86-272.
5. If your sales representatives, whether they are employees or independent contractors, have the right to approve sales orders in the state of solicitation, then P.L. 86-272 protection may be lost. Sales orders should be sent out of state for approval.

These are just a few of the main points to consider when applying P.L. 86-272 to your company's situation. If you are not sure whether your company has nexus or is protected under P.L. 86-272, please contact me.

Minnesota: Research Credit Confusion???

In 2008, House Bill HF 3149 changed some language in Minnesota statute 290.068, Subd 3, which apparently has caused some confusion among taxpayers. Therefore, I thought I would try to provide some clarity.

CONFUSION??

HF 3149 changed the language of 290.068, Subd 3, by saying:

"the credit for the taxable year shall not exceed the liability for tax. 'Liability for tax' for purposes of this section means the tax imposed under Section 290.06, subdivision 1, for the taxable year reduced by the sum of the nonrefundable credits allowed under this chapter."
Before the amendment, the statute said:

"the 'liability for tax' for purposes of this section means the tax imposed under this chapter."

Some taxpayers interpreted this change as creating a new limitation on the use of the Minnesota research credit, such as limiting the credit to the difference between a taxpayer's regular tax liability and it's alternative minimum tax liability. However, that is not the case.

CLARIFICATION

The House Research Bill Summary related to Bill HF 3149 states that the change in language in the credit for increasing research activities was made to clarify that the research credit applies against the regular corporate franchise tax and not the alternative minimum tax. Effective beginning in tax year 2008.

If you follow the form instructions and the statute 290.068, Subd 3, you will find that the credit is always limited to a taxpayer’s “regular franchise tax” liability.

Therefore, if you are in AMT, the credit is still available, but it is limited to the amount of the taxpayer’s “regular franchise tax” liability.

If you have any questions regarding your Minnesota research credit, please contact me at brian.strahle@bakertilly.com.

Colorado: Proposals Pass House and Senate!

Colorado is seriously considering the following:

1. Limiting the amount of NOLS that a corporation may claim for tax years beginning on or after January 1, 2011, but prior to January 1, 2014, to $250,000 (House Bill 1199, approved in Senate, 2/10/10). See the bill for all of the details.
2. Suspending the sales tax exclusion for sales and purchases of electricity, coal, gas, fuel oil, steam, coke, or nuclear fuel for use in processing, manufacturing, mining, refining, irrigation, construction, telegraph, telephone, and radio communication, street transportation services, and all industrial uses (HB 1190, approved in Senate 2/10/10).
3. Changing the taxation of "standardized software" or "pre-packaged software." Under the proposal, tangible personal property subject to tax would include "standardized software," without regard to how it is acquired by the purchaser or downloaded to the purchaser's computer. Separately stated IT services or separately stated custom software that is part of "modified off-the-shelf software" would not be intended to be taxed as long as they constitute "pure" custom software (HB 1192, approved in Senate 2/10/10). Would take effect on March 1, 2010.
4. Retailers that do not collect Colorado sales tax would be presumed to be doing business in the state if that retailer is part of a controlled group of corporations that has a component member that is a retailer with physical presence in the state. The presumption would be rebuttable. The bill includes additional requirements. (HB 1193, approved in Senate 2/10/10).

If you operate in Colorado, stay tuned to see if these changes get enacted. They are getting close.

For current updates, go to COLORADO.

Illinois: Pass-Through Entity Payments Correction (Form IL-1000)

Correction for 2009 Form IL-1000, Pass-through Entity Payments Income Tax Return

Issue:
The 2009 Form IL-1000 does not allow a place for taxpayers to take credit for payments made on Form IL-1000-P, Pass-through entity prepayment voucher. How do we calculate the return and take credit for those payments?

Answer:
For 2009, you should calculate the return as it is provided. After calculating Line 8, Tax due, you may subtract any payment amounts you made on Form IL-1000-P, before writing your check or money order for payment. Be sure to write the amount you are actually paying in the box at the top of the form because it may be different from the amount you are actually paying.

EX:
Line 8 – $1000.00
IL-1000-P payments made – $500.00

Make annual payment for $500.00 and write $500.00 in the box at the top of the form.

EX:
Line 8 – $1000.00
IL-1000-P payments made – $1000.00

Send no annual payment with the return and write $0.00 in the box at the top of the form.

EX:
Line 8 – $1000.00
IL-1000-P payments made – $1500.00

Send no annual payment with the return, write $0.00 in the box at the top of the form, and be sure to distribute total payments made, including any overpayment, on Schedule K-1-P or K-1-T to partners/shareholders/beneficiaries because you, as the entity, cannot claim a refund on this return. Only owners are allowed to claim refunds on their Illinois annual returns.

Minnesota: State of the State Address = Jobs Creation Bill??

In Minnesota, Governor Tim Pawlenty delivered his State of the State Address yesterday. Within his speech, he communicated that he would be proposing a "Jobs Creation Bill" that has six vital parts:

1. A 20% reduction in the corporate tax rate;
2. A 20% exclusion from taxation for small businesses;
3. An angel investment tax credit;
4. A supercharged research and development tax credit;
5. A capital gains exclusion for qualified investments; and
6. Incentives for companies to invest in Minnesota small businesses.

Currently Minnesota has the 8th worst business tax climate with the 3rd highest corporate tax rate in the world. With Minnesota's budget deficit currently estimated at $1.2 billion and growing, the Governor is seeking to cut spending and taxes to encourage economic investment and development within Minnesota.

Stay tuned to see if any of the Governor's proposals get enacted.

Michigan: Disregarded Entities ON ALERT!

Is it just me, or does Michigan like to be the center of attention? Okay, just a little humor.

ATTENTION: DISREGARDED ENTITIES!

If you are operating in Michigan or have any connection with Michigan today or especially in the past, you are going to want to read Michigan's latest NOTICE to taxpayers regarding KMART Michigan Property Services, LLC.

According to the Notice and as a result of the Court of Appeals case,

KMPS was required to file a SBT return, regardless of its classification as a disregarded entity for federal tax purposes, because KMPS fit within the statutory definition of a “person” conducting business activity and the SBTA required all persons conducting business activity in the state to file a SBT return. Therefore, the SBTA does not support the requirement of RAB 1999-9 that an organization that is a disregarded entity for federal tax purposes for a given taxable period must also file as a disregarded entity for state tax purposes.

RETROACTIVE APPLICATION!!

The main point in all of this is that Michigan will apply the result of the Kmart court case to all open tax years.

RETURNS REQUIRED FOR ALL TAX YEARS EXCEEDING FILING THRESHOLD

Pursuant to Kmart, persons that are disregarded entities for federal tax purposes that filed as a branch, division, or sole proprietor of their owner for SBT purposes ("previously disregarded entities") must now file a separate SBT return for all open tax periods.

Previously disregarded entities are considered non-filers for statute of limitations purposes under MCL 205.27a. Consequently, returns must be filed for all tax years for which the previously disregarded entity exceeds the filing threshold.

NOTE: Disregarded entities may be eligible to file a Voluntary Disclosure Agreement to limit the lookback period; however, at this time, it is unclear.

AMENDED RETURNS FOR TAXPAYERS THAT INCLUDED DISREGARDED ENTITIES

Persons that previously filed SBT returns that included one or more previously disregarded entities must amend their returns for all open periods. These persons may not amend returns beyond the statute of limitations set forth under MCL 205.27a.

ALL ACTION MUST TAKE PLACE BY SEPTEMBER 30, 2010

All persons required to file or amend a return under Kmart and this Notice must do so by September 30, 2010.

INTEREST AND PENALTIES

Interest under MCL 205.23 and MCL 205.24 is due for any deficiencies in tax payments and shall be added to the tax from the time the tax was originally due. Interest on refunds due to amended returns or returns filed by previously disregarded entities shall be calculated and added to the refund commencing 45 days after the claim is filed.

Failure to file penalties under MCL 205.24 will be waived for all returns filed and paid by September 30, 2010. Penalty will be assessed against any previously disregarded entity that fails to file a required return by September 30, 2010.

REGISTRATION, FILING, CONTROLLED GROUPS

Additional guidance on registration, filing and controlled groups is provided in the NOTICE.

CURRENT RECOMMENDATION?

The Michigan legislature may take action before September to clarify or rectify this situation. Also, additional information from the Michigan Department of Treasury may be released to provide more guidance. Therefore, disregarded entities may want to hold-off on complying with this notice until things become clearer.

If you have any questions or need assistance, please contact me at brian.strahle@bakertilly.com.

Washington: Economic Nexus and Market Based-Sourcing PROPOSED!

Washington has proposed an economic nexus standard for the business and occupation (B&O) tax, single-sales factor apportionment for financial institutions, and market-based sourcing for service revenue.

ECONOMIC NEXUS

According to HB 3157, for purposes of imposing the state business and occupation (B&O) tax on service activities and the activity of receiving royalty income, a business or individual will have substantial nexus with the state if the individual or business meets one of the following requirements:

1. An individual is a resident or domiciled in the state;
2. A business entity is organized or commercially domiciled in this state; OR
3. The individual or business is organized or domiciled outside the state but has more than $50,000 of property in the state, more than $50,000 of payroll in the state, more than $500,000 of receipts from this state, or at least 25 percent of the individual's or business's total property, total payroll, or total receipts in this state. This nexus standard only applies to service activities and the activity of receiving royalty income.

A business or individual with substantial nexus in any tax year is deemed to have substantial nexus with the state for the following four tax years.

SINGLE-SALES FACTOR APPORTIONMENT / MARKET-BASED SOURCING

According to HB 3157, apportionment using the receipts factor would replace the three-factor apportionment formula for financial institutions and the cost apportionment formula for other businesses providing services. The language in the bill is as follows:

Except for financial institutions, gross income is attributable to this state based on the following series of hierarchical rules:

1. Income is attributable to this state if the customer received the benefit of the service in this state or used the business's intangible property in this state;
2. If the customer received the benefit of the service or used the intangible property in more than one state, income is attributable to the state where the service was primarily received or where the intangible property is primarily used;
3. If income cannot be attributed under the foregoing, then the income is attributable to the state where the customer ordered the service or where the royalty agreement was negotiated;
4. If income cannot be attributed under the foregoing, then the income is attributable to the state to which the billing statements or invoices are sent to the customer;
5. If income cannot be attributed under the foregoing, then the income is attributable to the state from which the customer sends payment to the business;
6. If income cannot be attributed under the foregoing, then the income is attributable to the state where the customer is located; and
7. If income cannot be attributed under the foregoing, then the income is attributable to the state where the business is domiciled.

For financial institutions, gross income is attributable to this state as follows:

1. Interest, fees, and penalties on credit card receivables, and net gains from the sale of credit card receivables, are attributable to this state if the billing address of the cardholder is in this state;
2. Interest, fees, and penalties on secured loans are attributable to this state if the property securing the loan is located within this state;
3. Interest, fees, and penalties on unsecured loans are attributable to this state if the borrower is located in the state;
4. Net gains on the sale of loans and loan servicing fees are attributable to this state in the same manner as provided in two or three for secured and unsecured loans; and
5. Interest, dividends, net gains, and other income from investment assets and activities and from trading assets and activities, are attributable to this state if the income is properly assigned to a regular place of business of the financial institution within this state. This would apply to income from investment securities, trading account assets, federal funds, futures contracts, forward contracts, swaps, and foreign currency transactions.

If the bill passes, it would take effect on July 1, 2010.

Sales Tax: Is Your Head in the Clouds? (Cloud Computing, that is)

As I have mentioned on this blog before, the sales taxation of digital products and electronic commerce have become increasingly more important issues. As everyone knows, states are hurting for revenue, and since our economy has moved more and more towards electronic commerce, the states must figure out a way to tax it, or else lose out on much needed revenue.

According to Wikipedia,

"Cloud computing" describes a new supplement, consumption and delivery model for IT services based on the Internet, and it typically involves the provision of dynamically scalable and often virtualized resources as a service over the Internet. The term cloud is used as a metaphor for the Internet, based on the cloud drawing used to depict the Internet in computer network diagrams as an abstraction of the underlying infrastructure it represents.

Typical cloud computing providers deliver common business applications online which are accessed from a web browser, while the software and data are stored on servers.

These applications are broadly divided into the following categories that emphasize the concept of "Everything-as-a-Service": Software as a Service (SaaS), Utility Computing, Web Services, Platform as a Service (PaaS), Managed Service Providers (MSP), Service Commerce, and Internet Integration.

How are the states going to tax it?

The problem with cloud computing is where is it located? What state has the right to tax it? Some states may tax it where it is used. Some states may tax it based on the location of the servers. Some states may tax it where the office of the cloud computing provider resides. This is only the beginning of the state of confusion regarding the state taxation of cloud computing and other electronic commerce.

As I have mentioned in earlier blog posts, some states like Washington, North Carolina, and Wisconsin have updated their laws recently to broaden their tax to tax more digital products. I have also mentioned how New York is really reaching to expand the sales tax to services delivered over the internet, not just tangible personal property delivered electronically.

Impact?

If you or your client is involved in cloud computing or selling just about anything over the internet, chances are, some state wants to tax that sale.

If you have any questions regarding the sales taxation of cloud computing, digital products, software or services over the internet, please contact me at brian.strahle@bakertilly.com.

Combined Reporting: "THE PROPOSALS"

Here come the Proposals.

The Florida House and Senate have proposed to require combined reporting beginning in 2011, and also to reinstate the Florida Intangible Tax starting January 1, 2011. (HB 675 and SB 1406).

Maryland has proposed to require combined reporting beginning in 2011 (HB 10).

New Mexico has proposed to require combined reporting beginning in 2011 (SB 90).

Iowa has proposed to require combined reporting (SSB 3122) starting January 1, 2010 (yes, retroactive).

Virginia has proposed to require combined reporting in 2011 (SB 705).

Will they be enacted?

Who's next?

Stay tuned.

"Amazon" Nexus Is Spreading Like Wildfire"

As expected, more states are following in New York's, North Carolina's and Rhode Island's footsteps.

Virginia (SB 660), Mississippi (SB 2927), New Mexico (HB 50) and Colorado (HB 1193) have proposed to adopt an"Amazon" nexus presumption bill similar to New York's.

These bills have their differences, but they are also very similar. The following is a sample of some of the language included in the bills:

A person with no physical presence in the state is presumed to be engaging in business in the state if:

1. that person enters into an agreement with an in-state resident under which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by link or an Internet web site, to that person; and
2. the cumulative gross receipts from sales by that person attributable to referred customers by all residents with such an agreement are greater than $10,000 during the preceding 12-month period.

The nexus presumption would be rebuttable by proof that the resident made no solicitation in the state that would satisfy U.S. constitutional nexus requirements on behalf of the person presumed to be engaging in business in the state.

So What?

If you are selling goods over the Internet or through an affiliate program, these bills, if enacted, may affect your tax obligations in the states mentioned above.

If you are in need of representation regarding "Amazon" nexus or other nexus issues, please contact me at brian.strahle@bakertilly.com.