View Page As PDF
Share Button
Tweet Button

Ohio: State Representative makes case for uniformity in municipal income tax rates, new bill introduced

Ohio residents are accustomed to the complexities of complying with municipal income taxes (or at least their tax preparers are). A resident of Ohio may be subject to more than one municipal-level taxing authority depending on where they live, where they work and other factors. Ohio Representative Cheryl Grossman (R–Grove City) authored a recent article in the Plain Dealer in which she pointed out that the state of municipal income taxes in Ohio is grossly out of line with other states and is hurting Ohio businesses.

According to Grossman:

Ohio has the most complicated and illogical local income tax system in the United States of America. Only ten states in the country have a municipal tax at all. Ohio is the only state in the nation where municipalities set their own rules and regulations, with almost 600 different municipalities utilizing about 300 different forms to collect local income tax on an annual basis. The next closest state with the highest number of forms is Pennsylvania, with a total of three forms for the entire state. This is a huge burden on both Ohio employers and employees, as some individuals who work/travel in several cities may fill out as many as 25 - 40 or more W-2 forms each year. A small business should not have to pay $150 to prepare and file a tax bill that is less than $5, or in some cases $0.00. This is inefficient, not business friendly, and comes with a high cost of compliance. It is time for a change.

To this effect, Representative Grossman has co-sponsored H.B. 5. According to the most recently issued analysis on the bill, H.B. 5 would, among other things: 

  • Require municipal corporations levying an income tax as of January 1, 2015, and that intend to continue levying the tax thereafter, to amend or repeal and re-enact their existing income tax ordinances in a form to comply with the bill's limitations;
  • Create the Municipal Tax Policy Board, composed of seven governor-appointed municipal tax administrators, to create rules, prescribe forms and other documents, provide instructional materials to taxpayers, and take other actions concerning the state-wide administration and enforcement of municipal income taxes;
  • Establish a uniform tax base applicable to all municipal corporations levying an income tax by further defining the types of income that municipal corporations must tax and the types they may not tax; and
  • Prohibit municipal corporations from taxing pass-through entities (such as partnerships, S-corporations, and limited liability companies) at the entity level. 

These are only a small handful of the numerous changes that would be effected by the 141-page bill if it were adopted as introduced. Most changes impose uniformity in the application of municipal tax laws to a taxpayer and also limit what and how a municipality may tax. Needless to say, if enacted, this bill would cause significant changes to the current municipal tax structure and effectively overhaul the taxes imposed by municipal authorities. 
Click here to read Representative Cheryl Grossman’s guest article published in the Plain Dealer
Click here to read the text of H.B. 5 as it was introduced. 

Illinois: Court holds that trucking company is subject to Illinois income taxes for driving through state

In Witte Brothers Exchange, Inc. v. Dept. of Revenue, 2013 WL 5476071 (Ill.App 1 Dist. 2013), the First District Appellate Court of Illinois held that the trucking company was subject to Illinois income taxes for its “pass-through miles” in the state, reversing the holding of the trial court. Pass-through miles, as the taxpayer contended, were miles traveling directly through the state without conducting any business while traveling through – no pickups or deliveries were made as trucks drove through Illinois.

In this case, the underlying taxpayer was Witte Brothers Exchange, Inc., an interstate trucking company (“Witte”). The Illinois Department of Revenue (the “Department”) assessed $136,303 against Witte for its pass-through miles in the state for its tax years ended in 2005 though 2007. The Department contended that Witt was deficient because it failed to include pass-through miles in the numerator of the apportionment factor as required under Section 304(d)(1) of the Illinois Income Tax Act.

Specifically, Section 304(d)(1) of the Tax Act provides:

Such business income (other than that derived from transportation by pipeline) shall be apportioned to this state by a fraction, the numerator of which is the revenue miles of the person in this state, and the denominator of which is the revenue miles of the person everywhere. For purposes of this paragraph, a revenue mile is the transportation of 1 passenger or 1 net ton of freight the distance of 1 mile for consideration. (emphasis added)

The trial court found in favor of Witt, relying primarily on a prior ruling involving an airline where its planes did not depart or land in Illinois. The court in that case ultimately held that where a company’s airplanes neither depart or land in Illinois, but merely flew over the state, the company was not subject to tax under Section 304(d)(1) of the Tax Act. Northwest Airlines, Inc, v. Department of Revenue, 295 Ill.App.3d 889 (1998). Witt argued at the trial court level that logically because Witt’s trucks did not pick up or deliver goods in Illinois, but merely passed through the state, its trucks should not be taxed. Trucking without pick up or delivery, Witt contended, was no different than flying over the state and therefore, by analogy, Witt’s activities in Illinois do not subject it to taxation.

The appellate court did not agree with Witt’s analogy. The appellate court, citing Northwest Airlines, explained that:

[T]he nexus requirement [of the commerce clause of the United States Constitution] cannot be satisfied. Flight plans for overflights are not filed with any Illinois state or municipal authorities. There are no voice communication with overflights, and such flights make no use of Illinois facilities, services, or employees. There exists no physical contact between overflights and this state, nor any economic connection. We do not find the mere possibility that an overflight will avail itself of services and facilities in this state in the event of an unscheduled landing sufficient to establish a nexus.

The court reasoned that while Witt did not perform any pick ups or deliveries in its travels through Illinois, it did utilize the state’s infrastructure and roadways, its property and employees were physically present in Illinois (not merely flying in its airspace), it performed the economic activity of providing shipping services involving travel through Illinois, and Witt’s trucks refueled while traveling through Illinois (thus using Illinois suppliers). Considering these facts, the court determined that Witt had sufficient presence in the state and was therefore, subject to the tax set forth under Section 304(d)(1) of the Tax Act.

It should be noted that Witt’s commerce clause challenge (U.S. Constitution, Art. I, § 8, cl.3) was not heard, as Witt failed to raise an issue of commerce clause violation at the trial court level. Further note that Section 304 of the Tax Act was amended to add Section 304(d)(3), which specifically covers the type of activity in which Witt engaged for tax years ending after 2008. 
Click here to read the text of Witte Brothers Exchange, Inc. v. Dept. of Revenue

Kansas: Department of Revenue issues guidance for same-sex couples

More and more states have been issuing guidance regarding how such states will treat same-sex marriages for state tax purposes in light of the Internal Revenue Service’s (IRS) determination in Revenue Ruling 2013-17 that for federal tax purposes, the IRS will recognize a marriage of same-sex individuals that was validly entered-into in a state whose laws authorize same-sex marriage, even if the married couple is domiciled in a state that does not recognize the validity of such same-sex marriage.

Kansas joins the group of states that will not recognize same-sex marriage for purposes of determining filing status on Kansas income tax returns, according to guidance published by the Kansas Department of Revenue (the “Department”) on October 4, 2013 in Notice 13-18.

The Department explained that the Kansas Constitution only recognizes marriages between one man and one woman. Consequently, same-sex married couples cannot file a Kansas income tax return using a married filing status.

The Department stated that same-sex individuals who are considered married for federal income tax purposes will need to file a separate Kansas income tax return using the filing status of single or head of household, as applicable. Same-sex married couples who file a joint federal income tax return must complete a worksheet provided by the Department to show the amount of income reported on the joint federal income tax return that should be allocated to each individual in order to determine the amount of federal adjusted gross income to use on the Kansas income tax return.

This guidance applies to tax returns filed for the tax year 2013 and going forward.

The guidance also clarified that even though Revenue Ruling 2013-17 provides that under certain circumstances same-sex married couples may amend their federal income tax returns to claim a married filing status, no such amended returns may be filed in Kansas to change such couples’ filing status to a married filing status.

The Multistate Tax Update will continue to follow developments in state tax law in the wake of Revenue Ruling 2013-17 and the U.S. Supreme Court’s ruling in United States v. Windsor (which struck down Section 3 of the Defense of Marriage Act (DOMA) on grounds that the federal interpretation of "marriage" and "spouse" to apply only to heterosexual unions is unconstitutional under the Due Process Clause of the Fifth Amendment). Such rulings have only begun their ripple effect throughout the United States at both the federal and state level. To be sure, a multitude of state legislation, rulings, guidance, and litigation will ensue as a result. If you have questions on how these rulings or other developments may affect you or your business, please contact us.

Click here to read the text of Notice 13-18. 

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.