Pennsylvania: Governor signs budget bill introducing many tax changes
On July 9, 2013, Pennsylvania Governor Tom Corbett signed House Bill 465 into law. The bill contains a number of significant changes to the Pennsylvania tax code, including:
Extension of the franchise tax for two years
Imposition of a corporate income tax add back requirement for amounts paid to related entities
Adoption of market-based sourcing for sales tax apportionment purposes
Extensive changes to the current tax appeals process
To residents of Pennsylvania, many of these changes were not a surprise. Here is a brief overview of some of these changes:
The Pennsylvania Legislature had intended that the franchise tax be eliminated by 2014, but extended it for revenue-raising purposes. The franchise tax is a tax on corporate entities recognized by the federal government that do business in Pennsylvania. The tax is based on an entity’s qualified capital stock value apportioned to Pennsylvania. For 2013, the rate is set at 0.89 mills, but the rate will be reduced to 0.67 mills in 2014. The rate will be further reduced to 0.45 mills in 2015, followed by total elimination of the tax for taxable years beginning after December 31, 2015. Although the tax is minimal, it is a burden on out-of-state businesses that conduct business in Pennsylvania.
The bill closes a major corporate loophole by requiring corporations to add back to their income any payments made to related entities located outside of Pennsylvania. Many businesses with locations in different states were taking advantage of Pennsylvania’s tax system that allowed them to avoid Pennsylvania’s state income tax by conducting transactions with affiliated entities, effectively transferring income to entities in other states. H.B. 465 works to end this practice by requiring Pennsylvania corporations to include on their tax returns income transferred out of Pennsylvania through certain affiliate transactions. For taxable years beginning after December 31, 2014, no deduction is permitted for “an intangible expense or cost, or an interest expense or cost, paid, accrued or incurred directly or indirectly in connection with one or more transactions with an affiliated entity.” The statute provides some limited exceptions to this rule.
Effective for tax years beginning after December 31, 2013, Pennsylvania adopted a market-based sourcing regimen in determining the location of certain sales. The following sales will generally be sourced to Pennsylvania:
The sale, rental, lease or other use of real property, if the real property is located in Pennsylvania
The rental, lease, or licensing of tangible personal property if the customer first obtained possession of the tangible personal property in Pennsylvania. If the tangible personal property is subsequently taken out of Pennsylvania, the taxpayer may use a reasonably determined estimate of usage in Pennsylvania
Services delivered to a location in Pennsylvania
Services delivered to a location both within and outside Pennsylvania are apportioned based on the percentage of the total value of the service delivered to the location in Pennsylvania
The tax appeals system was amended to restructure the Board of Finance and Review into a three-person panel to hear all tax appeals. The panel of the Board of Finance and Review will be made up of three appointed independent tax professionals. The State Treasurer will appoint one of the individuals, while the Governor will appoint the other two. The Governor’s appointees require approval by the senate. Many tax professionals claim that because the appointees will be more connected to the political and election process, they will make more favorable tax rulings for taxpayers.
The bill is not limited to these changes; other changes include items, such as the repeal of the loans tax, rewriting of the bank shares tax, and the exemption of qualified family business interests from the inheritance tax.
Click here for the full text of H.B. 465.
North Carolina: Personal and corporate income tax rates reduced, estate tax repealed
On July 23, North Carolina Governor Pat McCroy signed a tax reform bill (H.B. 998), which among other things, replaced the graduated personal income tax rate with a flat tax, reduced the corporate income tax rate, retroactively repealed the estate tax beginning January 1, 2013, and expanded the sales tax base.
In a statement announcing the signing of the bill, the Governor stated that “[t]his reform package puts more money in families’ budgets and will restore confidence for North Carolina businesses. Because of this package, job creators will think about relocating to our great state.”
Specifically, the bill replaced North Carolina’s graduated personal income tax rates of 6 percent, 7 percent and 7.75 percent with a flat tax of 5.8 percent in 2014 and 5.75 percent in 2015. For tax years beginning on or after January 1, 2014, the bill eliminated personal exemptions, but increased the standard deduction. The bill also capped itemized deductions for personal residence interest and real property taxes at $20,000.
The bill reduced North Carolina’s corporate tax rate from 6.9 percent to 6 percent in 2014 and to 5 percent in 2015. If the state meets certain revenue targets, the corporate tax rate will be further reduced to 4 percent in 2016 and 3 percent for tax years after 2016.
Among other tax reforms, the bill broadened the sales tax base, effective January 1, 2014 to include certain entertainment events and service contracts related to warranties, maintenance and repairs.
Click here to read the full text of the bill.
Texas: State comptroller cracks down on retailers that take advantage of municipalities with lower tax rates
The Texas Legislature passed legislation that gives the Texas Comptroller of Public Accounts (the Comptroller) the ability to scrutinize retailers’ proclaimed places of business in an effort to weed out potential schemes aiming to take advantage of lower tax rates in certain municipalities. The law was enacted on June 14, 2013 and will go into effect on September 1, 2013. The law narrows the definition of a “place of business of a retailer” to exclude any locations where the retailer does not conduct significant business. The law gives the Comptroller the ability to exclude a place of business if it determines that the place of business is being used solely to take advantage of a lower municipal tax rate. The Texas Legislature created this law in response to schemes by retailers who contracted with offices in jurisdictions with low sales tax rates to reprocess invoices, purchase orders and other similar records.
To combat these schemes, the law provides criteria that the Comptroller will use in making its determinations of whether particular locations qualify as legitimate “places of business.” The criteria include:
Whether the location is operated for the purpose of receiving orders for taxable items
- Whether the location receives three or more orders each calendar year
- Whether the location is operated solely for the purpose of avoiding sales tax legally due, or to rebate a portion of sales tax due
The law additionally provides that the location will not be considered to being used solely for tax avoidance purposes if it “provides significant business services, beyond processing invoices, to the contracting business, including logistics management, purchasing, inventory control or other vital business services.” Furthermore, the law excludes kiosks as places of business.
Kiosks are defined as small stand-alone structures that:
Are used solely to display merchandise or submit orders from a data entry device
Are located entirely within a location that is the business of another retailer (i.e., a shopping mall)
Do not have taxable items immediately available for delivery to the customer
This law reflects the over-arching goal to keep businesses honest in claiming their tax liabilities. While this law does not make it illegal for companies to honestly set up shop in municipalities with lower tax rates in order to take advantage of lower tax rates, it does address certain questionable practices associated with classifying the location of sales.
Click here to read the text of S.B. 1533.
For additional information regarding these subjects or any other multistate tax issues, please contact:
David M. Kall
Susan Millradt McGlone
Jeremy J. Schirra
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.