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3 decisive outcomes from the midterm elections

Nevada: Voters decline the margin tax initiative

This election season, the Tax Foundation (Foundation) was closely watching voters in Nevada to see if they would approve the implementation of a margin tax, a member of the gross receipts tax family. The Foundation reported that the initiative was an attempt to raise revenue for public schools, but that voters defeated it “in a landslide.”

Prior to the election, the Foundation feared that Nevada would join the five other states—Delaware, Ohio, Virginia, Washington, and Texas (which has a modified version)—that have what it considers to be an economically damaging tax.

According to the Foundation, “[g]ross receipts taxes are complex business taxes that are imposed at a low rate but on a wide base of transactions (even intermediate goods and services). This results in tax pyramiding as taxes pile up on one another as goods move through the production chain. This is non-neutral, non-transparent, and complicated—the opposite of smart tax policy.”

Further lamenting the nature of the tax, the Foundation quoted Indiana University Professor John Mikesell’s reference to Texas’ modified version:

[The Texas margin tax] is…a badly designed business profits tax, like those that emerged in the newly independent states of the former Soviet Union...combin[ing] all the problems of minimum income taxation in general—excess compliance and administrative cost[s], penalization of the unsuccessful business, undesirable incentive impacts, doubtful equity basis—with those of taxation according to gross receipts.

The Foundation noted two interesting features about the vote in Nevada. First, although the AFL-CIO was the group that filed the initiative, it later passed a resolution to officially oppose it, recognizing that it would “cost many of our members their jobs and raise the cost of living on Nevadans on a fixed income and on citizens that are still struggling to make ends meet after years of a terrible recession.”

Second, pre-election polling numbers showed that a slight majority, or 51.25 percent, supported the initiative. This turned out to be markedly different from the actual results. The Foundation suggested that this could have been caused by proponents’ misleading branding, referring to the margin tax as the Education Initiative, and that voters did not know it would create a new tax.

California: Alameda County voters approve of a tax to fund transit projects

In Alameda County, the seventh most populous county in California with more than 1.5 million people, about 70 percent of voters approved ballot measure BB.

According to the ballot language, the measure will accomplish the following:

  • Expand and modernize BART (Bay Area Rapid Transit) in Alameda County;
  • Improve transit connections to jobs and schools;
  • Fix roads, improve highways, and increase bicycle and pedestrian safety;
  • Reduce traffic congestion and improve air quality; and
  • Keep senior, student, and disabled fares affordable.

In an impartial analysis prepared by County Counsel, the ordinance specifically implements three elements:

  1. An extension of the existing 0.5 percent transactions and use tax until March 31, 2045, for transportation purposes, which would have expired in March 2022;
  2. A 0.5 percent increase in the transaction and use tax, resulting in a total tax of one percent; and
  3. Authorization for the Alameda County Transportation Commission to issue limited tax bonds.

The analysis acknowledged opponents’ arguments. The opposition focused on the fact that the current transportation sales tax will double and the 30-year extension would “saddle Alameda County's struggling middle class, seniors, poor, and small businesses with the highest county sales tax in California.” Opponents further asserted that this was ill-advised in light of declining public transportation use and worsening traffic congestion.

North Dakota: Voters amend the state constitution to ban transfer taxes

Almost 75 percent of voters approved Measure 2, which amended the state constitution to prohibit the state and any political subdivision from imposing mortgage, sales, or transfer taxes on the mortgage or transfer of real property.

The National Conference of State Legislatures observes that 37 states (North Dakota previously represented the 38th state) and the District of Columbia have such a tax. The monies can be used for specific purposes, like affordable housing and open space development.

It is possible that Measure 2 sailed through so easily because of the growth in the state’s oil industry. The New York Times recently reported that “North Dakota has shed its identity as an agricultural state in decline to become an oil powerhouse second only to Texas…given the state’s history of population loss and economic decline,” officials are delighted to exploit the untapped potential “deep underneath the sweeping prairies and rugged badlands of western North Dakota.”

Last year, the Financial Times (FT) noticed that North Dakota’s housing was not keeping up with the oil boom, which the FT equated to California’s gold rush of the 1800s. The FT acknowledged that the resulting 80 percent increase in population since 2010 created a housing shortage and housing price surges of up to 30 percent. The article notes that new housing inventory has alleviated some pressure, but not enough.

Indiana: Internet purchases carry sales and use taxes for Hoosiers

In light of the upcoming holiday shopping season—beginning with Black Friday and Cyber Monday—Indiana’s Department of Revenue (DOR) reminds consumers that online purchases are subject to sales and use taxes that one must report on their state tax returns.

As the DOR points out:

  • Sales tax is paid on most items at retail stores. When one buys an item from a retailer, one will pay Indiana’s seven percent sales tax on that purchase at the time of the purchase (though there are a few exceptions). The retailer collects the tax and sends it to the state.
  • One owes a use tax when purchasing something on the Internet but not paying sales tax on it. In addition, a Hoosier owes a use tax on purchases made while traveling outside of Indiana. This tax has been reported on and remitted with the state income tax return since 1969.

According to a 2014 Tax Foundation ranking, Indiana’s seven percent state tax rate is the second highest in the nation, behind only California’s 7.5 percent rate. Mississippi, New Jersey, Rhode Island, and Tennessee also have a seven percent state tax rate.

Why states charge sales tax

The Tax Foundation explains that general sales taxes originated in the Great Depression era as an emergency measure, needed because of the collapse of property tax revenues. Mississippi was the first state to collect a sales tax in 1930. Today, only Alaska, Delaware, Montana, New Hampshire, and Oregon have no statewide sales tax.

Beyond state sales taxes, the Tax Foundation notes that local sales taxes exist in 38 states, resulting in almost 10,000 different sales tax jurisdictions. While Indiana only has one tax jurisdiction, other states have hundreds, or, thousands. California, for instance, has 231, Washington has 346, Missouri has 1,242, and Ohio has 96. For this reason, Indiana’s rank drops to #21 when taking into account the state and local tax rates.

Lost e-commerce related taxes

According to a Nov. 2011 estimate by the Indiana Fiscal Policy Institute, the amount of lost e-commerce related sales taxes ranged from $39.6 million to $114.3 million for fiscal year 2012. That same year, reported that Indiana had reached an agreement with the online retailer that allowed the state to start collecting sales taxes on Internet purchases starting on Jan. 1, 2014, or 90 days from the enactment of federal legislation, whichever came first.

Indiana is not the only state suffering from this problem. A pre-Thanksgiving Cleveland Plain Dealer story revealed that “Ohio consumers will spend about $1 billion on Internet purchases from sites like that don't charge or collect sales tax,” which costs the state about $70 million in lost sales tax revenue.

No federal solution quoted Indiana’s then Governor Mitch Daniels as declaring that the “only complete answer to this problem is a federal solution that treats all retailers and all states the same. But for now, Amazon has helped us address the largest single piece of the shortfall, and we appreciate the company working with us to find a solution.”

In 2013, the Senate passed the federal Marketplace Fairness Act, S-743, but it went nowhere in the House. A House version sponsored by Arkansas Rep. Steve Womack in 2013, HR 648, also sits idle. And just last week, an Arkansas News article observed that while Rep. Womack still backs the initiative, other prominent republican leaders do not, making it unlikely to proceed any time soon.

New York: Department of Revenue extends filing deadlines for taxpayers affected by snowstorms

Last week, Gov. Cuomo declared a State Disaster Emergency for 26 New York state counties affected by the snowstorms that began on Nov. 18, 2014. According to the New York State Department of Taxation and Finance announcement, the Tax Commissioner thus postponed certain tax filing and payment deadlines for the period beginning on or after Nov. 18, 2014, and ending before Dec. 15, 2014, for taxpayers who were directly affected by the storms. The new deadline is now Dec. 15, 2014.

The postponement affects these deadlines:

  • Filing any returns, including those for personal income tax, corporate taxes, sales tax, and any other taxes administered by the tax department;
  • Paying any tax or installment of tax, including installment payments or estimated taxes (with certain exceptions, listed in the announcement);
  • Filing any requests for extensions or additional extensions of time to file;
  • Filing for a credit or refund;
  • Filing for a redetermination of a deficiency, or an application for review of a decision;
  • Allowing a credit or a refund;
  • Assessing tax;
  • Giving or making a notice or demand for repayment of tax;
  • Collecting tax by levy or otherwise;
  • Bringing suit by New York State for any tax liability;
  • Making of elections; and
  • Any other act required or permitted under the tax law or specified in the New York State Tax Regulations.

The announcement provides that “all deadlines for performance of the above-required acts occurring during the period on or after Nov. 18, 2014, and ending before Dec. 15, 2014, have been postponed to Dec. 15, 2014. Interest at the appropriate underpayment rate must be paid on tax payments received after Dec. 15, 2014.”

The announcement defines eligibility as follows:

  • Victims of the snowstorms who reside in or have a principal place of business in the designated counties;
  • All workers assisting in the relief activities in the designated counties;
  • Any taxpayer whose records necessary to meet tax filing, payment, or other deadlines are not available due to the snowstorm;
  • Taxpayers who have difficulty in meeting tax filing, payment, or other deadlines because of disruptions in the transportation and delivery of documents by mail or private delivery services, or due to disruptions in communications services (for example, telephone, facsimile, or electronic mail), resulting from the snowstorms;
  • Taxpayers whose tax practitioners were unable to complete work to meet tax filing, payment, and other deadlines on behalf of their clients due to the snowstorm.

The 26 affected counties are: Allegany, Cattaraugus, Cayuga, Chautauqua, Clinton, Erie, Essex, Franklin, Fulton, Genesee, Hamilton, Herkimer, Jefferson, Lewis, Livingston, Madison, Monroe, Montgomery, Niagara, Oneida, Onondaga, Orleans, Oswego, Otsego, St. Lawrence, and Wyoming.

The announcement contains additional information pertaining to the above-mentioned exceptions, how to obtain relief, and how to obtain forms, instructions, and other assistance.

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

David M. Kall

David H. Godenswager, II

Susan Millradt McGlone

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.