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Small business tax survey lists Nevada as top state, Ohio in top 10

Last month, the Small Business & Entrepreneurship Council (CBECouncil) published its annual Small Business Tax Index 2014 (the Index), an index to rank the condition of state tax systems from best to worst for entrepreneurs and small businesses. The CBECouncil found that states such as North Carolina, North Dakota, Kansas, Arizona, New Mexico, and Indiana had notably improved their tax climates. However, none of these improved states made CBECouncil’s top 10.

The Index rankings focus on the cost burden of each state’s tax system and how such costs might affect entrepreneurs and small business. The Index included 21 different tax measures and combined those measures into a single index for ranking purposes. Among the 21 measures considered were the state’s top personal income tax rate, the state’s top individual capital gains tax rate, and the state’s top corporate income tax rate.

Rounding out the top 10 best state tax systems were:

1. Nevada
2. South Dakota
3. Texas
4. Wyoming
5. Washington
6. Florida
7. Alabama
8. Ohio
9. Colorado
10. Alaska

The six lowest-ranking state tax systems were:

45. New York
46. Iowa
47. Hawaii
48. New Jersey
49. Minnesota
50. California

As with any index, the author must make certain choices in their use of data that impact the ranking results, making this Index—or any index for that matter—more of a general tool than a one size fits all proposition. Consequently, the results of any state tax survey or index may or may not be the most meaningful expression of which state tax climates are best for your specific business. For instance, certain taxes which were heavily weighted in this Index may not apply to your business, and eliminating the effect of such taxes on the Index may have the potential to make the 38th ranked state in your business’ top five.

Nonetheless, we found the Index to be a succinct and useful tool for small businesses in their tax planning and that the Index’s many included data points were organized in a helpful and comparable fashion. As alluded to above, this Index should not replace tax planning with your advisor if your business has the ability to choose between state tax climates or exposure.

Proposed amendments to the Multistate Tax Compact moving forward to member state survey

On May 8, 2014, the Executive Committee (Committee) of the Multistate Tax Commission (Commission) approved moving forward with the process to adopt four amendments to Article IV of the Multistate Tax Compact (Compact). The proposed amendments relate to nonbusiness income, the definition of “sales” factor weighing, and the sourcing of service and intangible revenue. The Committee voted to move forward with the next step in the amendment process, which is a “Bylaw VII” survey by the member states. The Compact has not been amended since its adoption by a number of member states in the late 1960s.

The Commission is an intergovernmental state tax agency which works on behalf of states and taxpayers to administer tax laws that apply to multistate and multinational businesses in an equitable and efficient manner. The Commission was created in 1967 as part of the creation of the Compact. Any actions taken by the Commission have no authority in law unless a state specifically adopts the actions as law.

The next step in the process of amending the Compact, the “Bylaw VII” survey, is a process wherein the member states indicate whether they would consider adopting the amendments. An indication of willingness to adopt the amendments, however, does not necessarily mean that such member states will ultimately do so. If a majority of the member states polled show an interest in adopting the amendments, then the amendments will be submitted for possible adoption by the Commission.

The recommended amendments and the sections of Article IV of the Compact that they would impact include:

  • Section 17: The amendment alters the rules governing the sourcing of sales, other than the sales of personal tangible property. The amendment would switch the sourcing from the traditional cost-of-performance method to a market-based sourcing method.
  • Section 9: The amendment involves factor weighing for apportionment purposes. The amendment would alter the language to allow the member states to define their own factor-weighing fraction and instead provides a recommended (but not required) formula, which includes a double-weighted sales factor. This would be a change from the current formula, which requires equal weighing of the sum of a taxpayer’s property, payroll, and sales factors divided by three.

  • Section 1(a): The amendment would change the language from “business income” to “apportionable income,” which is more expansive. The amendment effectively requires member states to apportion business income based on a constitutional standard. In addition, the word “regular” would be eliminated from describing what income arises from a taxpayer’s tangible and intangible property.

  • Section 1(g): Regarding the definition of sales, the amendment would exclude Treasury and hedging activities when calculating gross receipts of a taxpayer other than a securities dealer.

If the result of the “Bylaw VII” survey is in favor of these amendments, then it is possible that such amendments would be voted on by the Commission at its annual meeting on July 30, 2014. Even if such proposals are adopted by the Commission, each member state would still need to decide whether to adopt such amendments in order to become law in a member state. Taxpayers should consider consulting with their professional tax advisors regarding how such amendments could affect their businesses.

California proposes changes to commercial property tax rules

The California Assembly of Revenue and Taxation Committee approved Assembly Bill 2372 (Bill), proposed by Tom Ammiano (D) and Raul Bocanegra (D), by a 6-2 vote. The Bill, introduced on Feb. 21, 2014 and amended on April 1, 2014 and May 19, 2014, seeks to close an existing loophole which has been included in the California property tax rules since 1978. Under current California law, Proposition 13, commercial real property owners are able to structure their commercial real property sale transactions to avoid a tax reassessment when changing ownership. The current law triggers a change in ownership reassessment tax when a legal entity or other person obtains a controlling or majority interest. In the past, commercial property owners have structured transactions involving a change in ownership by dividing the property shares to avoid triggering the property reassessment tax.

Progressive groups have been trying to close this existing tax loophole for years. Tom Ammiano, one of the Bill’s proposers and a long-time proponent of changing the current law, asserts that changing the law is necessary because the loophole causes the property tax burden to be shifted “onto the backs of homeowners and other individuals.” Ammiano has introduced five bills aiming to change the commercial property tax in the last six years. However, this bill is different because it is supported by both long-time proponents of the change, like The California Tax Reform Association, and groups who have opposed these changes in the past, such as the California Business Roundtable, the California Chamber of Commerce, and the California Business Properties Association.

The current version of the Bill reflecting a compromise made with certain business groups, proposes to close the property tax loophole by including that a reassessment of the property tax will be triggered “when 90 percent or more of the ownership interests in a nonaffiliated legal entity are sold or transferred in a single transaction to a nonaffiliated legal entity or person, whether by merger, acquisition, private equity buyout, transfer of partnership shares or any other means by which a nonaffiliated legal entity or person acquires the ownership interests of another legal entity,…the purchase or transfer of the ownership interest is a change of ownership of the real property owned by the legal entity, whether or not any one legal entity or person that is a party to the transaction acquires more than 50 percent of the ownership interests.” This “closing of the loophole” would be in addition to the restrictions under current law.

The Bill would also require strengthened reporting requirements and enforcement when a reassessment occurs, and greater transparency for deeds filed for real property and financial transactions. For example, the old law imposed a 10 percent penalty tax for any failure to report a change in ownership to the State Board of Equalization; the Bill imposes a 15 percent penalty tax for failures to report changes in ownership.

The Bill is currently being considered in the Assembly Appropriations Committee. If eventually signed into law as is, the Bill would take effect immediately as a tax levy. Taxpayers that are thinking of purchasing commercial real property located in California should consult with their tax advisors regarding the impact of this proposed Bill, as structuring methods that worked in the past to avoid triggering a property tax reassessment may no longer achieve the desired results.

For additional information regarding these subjects or any other multistate tax issues, please contact:

David M. Kall

Susan Millradt McGlone

Jeremy J. Schirra

Multistate Tax Services

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.