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New York: Governor’s tax commission recommends $2 billion in relief for property taxes, corporate income taxes and estate taxes

On Tuesday, December 10, 2013, the New York State Tax Relief Commission (the Commission) released its Final Report (the Report). A prior announcement related to the formation of the Commission was previously covered in the Multistate Tax Update. New York Governor Andrew M. Cuomo charged the Commission, which was formed on October 2, 2013, with devising a series of targeted tax relief valued at $2 billion in three years. The Commission's purpose was to focus its efforts on alleviating the tax burden on individuals, families and businesses, emphasizing relief in the areas of local and school property taxes. New York is known for having the highest property taxes in the nation. The Commission itself recognized that New York taxpayers in 2010 “had the dubious honor of paying the highest actual tax bills in the United States.”

The Commission determined that it would be sensible to use $1 billion of the $2 billion targeted tax relief pool to reduce property taxes. The remaining $1 billion would go to businesses, families and individuals.

Under Chapter 97 of the Laws of 2011, the state established a property tax cap that affected local governments, most school districts (excepting New York City) and a number of other taxing authorities in New York. Under this law, increases in property tax levies cannot grow more than the greater of two percent or the rate of inflation during any given year. However, overrides of the cap are permitted.

The Commission’s property tax relief proposal effectively gives an incentive to such local taxing authorities to keep their property tax levies within the cap. Assuming the local taxing authority stays within the cap, taxpayers paying such “capped” property tax increase would be entitled to a rebate in the amount of the increase. This program would last for two years and would effectively freeze property taxes at 2014 levels. Because New York City is excluded from the property tax cap law, New York City is excluded from this proposal. This recommendation seems to be a departure from the status quo in New York because New York City often receives greater benefits when distinctions in benefits are made.

The Commission also proposes additional property tax relief to low- and middle-income taxpayers based on their ability to pay. The Commission did not provide any specifics in this area but stated that it is open to alternatives, e.g., providing greater benefit to those who can least afford to pay property taxes or providing a lesser benefit to a greater number of taxpayers (or some combination).

Other recommendations the Commission made include:

  • Reducing the property tax burden on manufacturers. The Commission recommended a corporate and income tax credit of 20 percent of real property taxes paid by manufacturers.
  • Lowering corporate income tax rates and simplifying the tax structure. The Commission recommended reducing the corporate income tax rate to 6.5 percent, the lowest corporate rate since 1968.
  • Reducing the corporate income tax rate on upstate New York manufacturers to 2.5 percent (as opposed to the general 6.5 percent corporate income tax rate discussed in the previous bullet).
  • Increasing the state estate tax exemption amount to $5.25 million (indexed for inflation) and lowering the applicable tax rate to 10 percent.
  • Eliminating the state nuisance taxes recommended by the New York Tax Reform and Fairness Commission. This would include:
    • Eliminating the tax on agricultural cooperatives
    • Eliminating the stock transfer tax
    • Repealing the “Add On” Minimum Tax in the Personal Income Tax (PIT)    

While the recommendations contained in the Commission’s Report are not binding, it is assumed that many or most of these recommendations will be brought before the state legislature by Governor Cuomo.

Reactions to the Report have been varied. Bloomberg reported that Kathryn Wylde, President of The Partnership for New York City (a business advocacy group), praised the recommendations. Ms. Wylde had reservations about the Report’s exclusion of New York City from the property tax relief, as the city is responsible for a large share of the state’s surplus. Ms. Wylde urged state lawmakers and Governor Cuomo to ensure that New York City receives a fair share of the relief contemplated by the Commission.

Assembly Speaker Sheldon Silver was reluctant to praise the recommendations, stating that it is “important that we have the resources necessary to fund vital programs.” According to the New York Times, Mr. Silver was also concerned about the fairness of the proposals to the residents of New York City. Senate co-leaders Dean Skelos and Jeff Klein both commended the Report.

Illinois Supreme Court invalidates local sales sourcing regulations used by taxpayers to minimize local sales taxes; Department of Revenue to provide further guidance

In a recent ruling by the Illinois Supreme Court (Court), the Court invalidated regulations providing that the place where sales orders are accepted determines the location of a sale for purposes of certain local Retailer’s Occupation Taxes (ROT). Many retailers had taken advantage of this regulation in order to reduce their ROT liability.

In Hartney Fuel Oil Company v. Hamer, the Court determined that the regulations impermissibly narrowed state statutes because such regulations failed to provide for a fact-intensive inquiry to source the sales for local ROT purposes to the jurisdiction where the predominate selling activities occurred and instead permitted a bright-line test sourcing the sales for local ROT purposes to the jurisdiction in which the sales orders were accepted. In response to Hartney, the Illinois Department of Revenue (Department) plans to issue new regulations to help taxpayers ascertain their ROT liabilities.

Background

Prior to Hartney, in order to reduce the Illinois local sales taxes imposed on a retail transaction, retailers would often structure their transactions so that the final acceptance of an order occurred in a jurisdiction with low or no local sales tax. This sourcing method was in accordance with the regulations promulgated by the Department, which permitted sales for local ROT purposes to be sourced to the jurisdiction in which the sales order was accepted.

Hartney Fuel Oil Company (Company) is a retailer of fuel oil and has its home office located in Forest View, Illinois (Cook County). From its Forest View office, the Company would set fuel prices, cultivate customer relationships and handle administrative tasks. The Company also had a sales office in Mark, Illinois (Putnam County). As part of its local sales tax planning, the Company would contract with a business located in Mark for the lease of office space and the services of a clerk to accept the final sales orders. The clerk was employed by the Mark local business and worked only out of the Mark office. Customers would call the Mark office to place daily fuel orders. The clerk in the Mark office would check the list of customers with approval to order on credit and would accept such order if the customer was on the list. The Company also had long-term fuel oil contracts which were negotiated out of the Forest View office and signed by the president of the Company at the Mark office.

Court’s ruling

The Company interpreted regulations issued by the Department as establishing a bright-line test sourcing the sales for local ROT purposes at the location where the seller accepts the purchase order, provided that the sale is at retail and the purchaser receives physical possession of the property in Illinois. The Department argued that a totality of the circumstances test (Circumstances Test) should be applied. The Circumstances Test is discussed in a section of the regulations that is different from the section of the regulations relied on by the Company. Under the Circumstances Test, the Department asserted, the sales would be sourced to Forest View instead of Mark.

The Court determined that the language of the ROT statute required a fact-intensive inquiry to source the sales for local ROT purposes to the jurisdiction where the selling activities predominately occurred. Based on this analysis, the Court determined that the regulations issued by the Department (and relied on by the Company) impermissibly narrowed the scope of the state statutes, contrary to legislative intent, because it included a bright-line test sourcing the sales for local ROT purposes to the jurisdiction where the final sales orders were accepted. Therefore, the Court invalidated the regulations. As a result, the Company is liable for the additional sales tax due to the rate differential in Forest View versus Mark.

Fortunately for the Company and pursuant to the Illinois Taxpayers’ Bill of Rights Act, the Department has a duty to abate any taxes and penalties that are assessed based upon erroneous written information. The Court determined that the Company’s approach to the ROT was consistent with the regulations published by the Department at that time. Therefore, the Court determined that the Department had a duty to abate the taxes and penalties it imposed on the Company for the audit period.

Department’s response to Hartney

The Department has stated that it will promulgate regulations in the near future to provide guidance to taxpayers in determining their ROT liabilities. Such guidance will provide a fact-specific approach consistent with the ruling in Hartney, as well as other court interpretations of the statutory language.

The Department advised taxpayers who collect ROT only in no or low-tax rate jurisdictions where they arrange for final acceptance of purchase orders to re-evaluate this procedure in light of Hartney. The Department stated in its guidance that:

Businesses engaged in this practice should revise their procedures for reporting local retailer occupation taxes to comply with the court’s decision in Hartney. In determining whether enforcement action is warranted against a retailer for failure to collect and pay the correct local retailers’ occupation taxes going forward, the Department will consider whether the taxpayer has made a reasonable, prompt, good faith effort to comply with the Court’s decision.

The Multistate Tax Update will continue to follow developments in the wake of the Court’s decision in Hartney.

Pennsylvania: Gas taxes increased to fund transportation spending bill

Pennsylvania Governor Tom Corbett recently signed into law a transportation infrastructure spending plan (H.B. 1060) that will pump billions of dollars into the state’s transportation system, funded in part by phasing out a cap on the oil company franchise tax.

The Pennsylvania oil company franchise tax imposes a 15.35 percent tax on the average wholesale price per gallon of liquid fuels. However, only the first $1.25 of the average wholesale price per gallon of liquid fuels was subject to the tax. This bill phases out such cap over a five-year period.

Effective January 1, 2014, the $1.25-per-gallon-cap will increase to $1.87 per gallon. Effective January 1, 2015, the per-gallon-cap will increase to $2.49. After December 31, 2016, the average wholesale price per gallon of liquid fuels shall be determined by the Pennsylvania Department of Revenue, provided that in no case will the average wholesale price be less than $2.99 per gallon.

It is anticipated that most, if not all, of the oil company franchise tax will be passed on to consumers. Rep. Matt Baker, who opposed the bill, stated in a news release that “the new taxes would cost motorists $5 more on an average tank of gas for a mid-sized car..., but could be more as the price of gas increases over time.”

Other funding sources for this bill include increases to certain fees and fines imposed on motorists, including increases in vehicle registration fees, driver's license fees and fines for traffic violations.

Click here to read the full text of this bill.

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

David M. Kall
216.348.5812
dkall@mcdonaldhopkins.com

Susan Millradt McGlone
216.430.2022
smcglone@mcdonaldhopkins.com

Jeremy J. Schirra
216.348.5444
jschirra@mcdonaldhopkins.com

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.

 

 

 

 

 

 

 

 

 

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