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New York: New 501(c)(4) reporting requirements: Is your donation still anonymous?

In 2010, the United States Supreme Court heard the case of Citizens United v. The Federal Election Commission, 558 U.S. 310. In that case, the court decided it was a violation of the First Amendment to restrict political expenditures by corporations, unions and associations. Since Citizens United, the amount of money spent by these groups on political activity has skyrocketed. The expenditures arising out of these contributions have been termed “dark spending” because many states do not require disclosure of contributions from individuals or groups to 501(c)(4) organizations. Thus, these organizations are allowed to spend significant amounts on elections without revealing their donors. A 501(c)(4) is a tax-exempt designation for organizations that engage in promoting social welfare, typically through charitable work, but also at times through participation in political issues and elections.

In an effort to end dark spending, New York Attorney General Eric Schneiderman has issued a set of regulations concerning donor and expenditure disclosures. Schneiderman’s regulations will require certain non-profit groups that engage in political activity in the State of New York to make so-called “anti-dark spending” disclosures in certain situations.

The regulations will require groups that spend $10,000 or more in a state or local election to report any expenses incurred, as well as any contributions received, that exceed $1,000. The organization would need to disclose the name of the corresponding contributor. In addition, the reporting requirements would be triggered with any spending on advertisements that advocate for the election or defeat of a candidate, political party or ballot referendum. Furthermore, any communications made 45 days prior to a primary election and 90 days prior to a general election identifying a candidate, political party or referendum, is subject to the same reporting requirements.

Consider this:

Organization X, a New York-based 501(c)(4), raises money to spend on awareness of a rare species of bird that is becoming extinct in New York. However, Organization X is struggling in its efforts and decides to get directly involved in the New York General Assembly elections. Organization X’s hope is that if it can help enough people win their respective seats and join the General Assembly, then Organization X can influence legislation that will help protect this rare species of bird. Organization X picks 11 seats to focus its efforts on, giving $1,000 to each seat. At this point, because Organization X has passed the $10,000 threshold for political expenditures on a New York election, it must now report all expenses incurred in its political efforts, as well as any contribution of $1,000 or more that was not set aside strictly for non-political spending.

After completion, these itemized reports would be released to the public, much like the reports submitted to the Federal Election Commission for federal campaign contributions and expenditures. Schneiderman stated that this is an effort to “bring to light” individuals who are funding efforts to shift elections. Schneiderman’s potential targets are likely wealthy and influential individuals who significantly fund political action committees supporting their respective ideologies. However, the reach of this regulation ensures that others will surely be affected.

Anti-dark spending regulations are likely to become a recurring theme across the country as more elected officials are answering the call to crack down on dark spending. As a taxpayer, if you give money to an organization with the hopes that the contribution will remain anonymous, and that organization engages in state or local political activity in New York, your name may be reported to the public. Under New York’s new regulations, if an individual’s contribution to a 501(c)(4) goes toward political spending that contribution must be reported. The only way the reporting requirements do not apply, according to the regulations, is if the individual’s contribution is not meant for political spending. According to the New York Attorney General, unless an individual expressly states that their contribution is not meant for political spending, it could be subject to reporting requirements even if the taxpayer did not intend for the contribution to go toward that spending.

If you wish to learn more about contributing anonymously to 501(c)(4) organizations, please contact us.

Ohio: Governor Kasich signs massive budget into law, implications for Ohio state taxes

Just after 8:00 p.m. on Sunday, June 30, Ohio Governor John Kasich signed Ohio’s new $62 billion budget bill. The 5,557-page law sat over three feet tall. The budget includes a $2.7 billion tax cut over the next three years. The law went into effect July 1, however, effective dates vary for different provisions. Governor Kasich stated he believed the budget bill illustrates his administration’s continued efforts to improve Ohio’s economy through income tax cuts, business incentives and new ways of funding education.

Republicans have praised the governor’s budget as one that cuts taxes for individuals and small businesses, stating 98 percent of Ohioans should see tax decreases. Democrats have critiqued the budget arguing it will disproportionately benefit the wealthy while sales tax changes will hurt lower-income Ohioans. Democrats have also argued the property tax shift will make it harder for local communities to fund essential services like education.

Some of the most notable changes to Ohio state taxes are outlined below:

Sales and use tax:

  • Effective September 1, 2013 the state sales tax rate will increase from 5.5 percent to 5.75 percent.
  • Effective January 1, 2014 specified digital products provided for permanent or less than permanent use are taxable.

Personal income tax:

  • The budget creates a new income tax deduction for individuals receiving small business income as a sole proprietor or as an owner of a pass-through entity. This deduction allows individuals to deduct 50 percent of business income included in the taxpayer’s federal adjusted gross income not otherwise deducted in calculating Ohio taxable income, to the extent such income is apportioned to Ohio. There is a $125,000 cap on this deduction per taxpayer per year ($62,500 for spouses who file separately and each report business income). This deduction can first be taken in taxable years beginning in 2013.
  • The law gives a 50 percent tax cut for certain small businesses structured as pass-through entities, such as S-corporations and partnerships, on the first $250,000 in net small business income.
  • Sometime later this year, withholding tables will be updated to reflect an 8.5 percent cut in the income tax rates for the current year. The income tax rates will be cut nine percent next year and 10 percent in 2015.

Commercial activity tax:

  • The minimum tax due for the commercial activity tax was changed as follows:
    • For taxpayers with annual taxable gross receipts of $1 million or less for the calendar year, the minimum remains $150
    • For taxpayers with annual taxable gross receipts greater than $1 million but less than or equal to $2 million for the calendar year, the new minimum is $800
    • For taxpayers with annual taxable gross receipts greater than $2 million but less than or equal to $4 million for the calendar year, the new minimum is $1,100, and
    • For taxpayers with annual taxable gross receipts greater than $4 million for the calendar year, the new minimum is $2,600

Property tax:

  • The law removed a 12.5 percent state tax credit of local property taxes.
  • Homestead property tax exemption will be limited to homeowners who are at least 65 and earn less than $30,000 a year.

Potential effect of Federal Marketplace Fairness Act:

Governor Kasich vetoed an item which would have imposed a state sales tax between out-of-state Internet retailers and Ohio residents. However, it is important to note Governor Kasich did not veto the provision, which would approve the Marketplace Fairness Act if and when it is passed by Congress. The proposed Federal Marketplace Fairness Act allows states to require out-of-state businesses to collect and remit sales taxes on such business’ qualifying remote sales. Governor Kasich rationalized his decision on the basis that similar sales tax provisions in other states have resulted in extensive litigation and Ohio should wait for Congress to take action on the issue before making such a policy change.

Click here to review Ohio’s new budget bill.

Illinois: Governor approves new taxes related to fracking

On June 17, 2013, Illinois Governor Pat Quinn signed the Hydraulic Fracturing Regulatory Act (Fracturing Regulatory Act), which provides for a regulatory structure governing horizontal hydraulic fracturing operations, and the Illinois Hydraulic Fracturing Tax Act (Fracturing Tax Act), which provides for a tax scheme imposed on the producers of oil and gas engaging in such fracking operations.

Severance taxes

The Fracturing Tax Act imposes a severance tax on oil and gas removed on or after July 1, 2013, from a well that is permitted, or required to be permitted, under the Fracturing Regulatory Act, for sale, transport, storage, profit, or commercial use.

The amount of such severance tax is three percent of the value of the oil or gas severed from the earth or water for the first 24 months of production. Thereafter, the severance tax rate imposed is:

  • Three percent for oil where the average daily production from the well during the month is less than 25 barrels
  • Four percent for oil where the average daily production is less than 50 barrels
  • Five percent for oil where the average daily production is less than 100 barrels
  • Six percent for oil where the average daily production is 100 or more barrels
  • Six percent for gas regardless of the volume of production

The severance tax will not apply to oil where the average daily production from a well is 15 barrels or less for a rolling 12-month period.

Local workforce tax rate reduction

The Fracturing Tax Act includes a tax incentive for using an Illinois construction workforce. The rate of severance tax imposed by the producers of the oil or gas will be reduced by 0.25 percent for the life of the well if a minimum of 50 percent of the total workforce hours on the well site are performed by Illinois construction workers, provided that such workers are being paid wages equal to at least the general prevailing hourly wage rate.

Collection and remittance

Under most circumstances, the first purchaser of any oil or gas sold will be required to collect the amount of the severance tax due from the producers by deducting and withholding such amount from any payments made to the producers and remitting the amount collected to the Illinois Department of Revenue (Department). Such first purchasers will be required to register with the Department and submit monthly returns to the Department remitting such severance taxes.

Click here for the full text of the Regulatory Fracturing Act and the Fracturing Tax Act.

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.