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Idaho: Governor signs bill prohibiting same-sex married couples from filing jointly

On Feb. 13, 2014, Idaho Gov. C.L. “Butch” Otter signed H.B. 375 into law after the bill was unanimously backed by state Republicans in the Legislature. H.B. 375 prohibits same-sex married couples who can file jointly for federal income tax purposes from doing so for state tax returns. Thus, the only option for a same-sex married couple is to file as single or, if qualified, as head-of-household.

As revised, Idaho Code § 63-3004(c) reads: 

For all purposes of the Idaho income tax act, a marriage must be one that is considered valid or recognized under section 28, article III, of the constitution of the state of Idaho and defined in section 32-201, Idaho Code, or as recognized under section 32-209, Idaho Code.

In Idaho, however, this measure to ban same-sex married couples from filing jointly is superfluous and redundant (redundancy intended). Under Section 28, Article III of the Idaho Constitution, only marriages between a man and a woman are valid or recognized in the state. Therefore, this statute amounts to Idaho’s legislature reiterating the state’s constitution. Some would posit that such legislation amounts to speech of the Idaho Legislature.

As we have observed in other states with similar constitutional prohibitions (and/or state law prohibitions) on same-sex marriage, the respective state’s department of revenue or equivalent agency will issue guidance reiterating the state’s position on same-sex marriage (see, e.g., South Carolina, Virginia, Ohio, North Carolina, Kansas, Louisiana, Wisconsin; but see Missouri for a divergent approach). In Missouri, the governor issued an executive order to enable same-sex married couples who file joint federal income tax returns to file joint state tax returns despite the state’s constitution prohibiting the recognition of same-sex marriages. Using Missouri as an example, signing H.B. 375 into law would effectively tie a future governor’s hands on the issue and prevent the Idaho State Tax Commission from issuing contrary guidance.

The Multistate Tax Update will continue to follow developments in the wake of the U.S. Supreme Court’s ruling in United States v. Windsor, as well as Revenue Ruling 2013-17 (holding, in part, that: (1) “husband” and “wife” include an individual married to a person of the same sex if the individuals are lawfully married under state law, and the term “marriage” includes such a marriage; and (2) a marriage of same-sex individuals that was validly entered into in a state whose law authorizes the marriage of two individuals of the same sex even if the married couple is domiciled in a state that does not recognize the validity of same-sex marriages). These holdings continue their ripple effect throughout the United States at both the federal and state levels. To be sure, a multitude of state legislation, rulings, guidance, and litigation will continue to ensue as a result. If you have questions on how these holdings or other developments may affect you or your business, please contact us. 

Ohio: Small business tax cut allows certain business owners to deduct up to half of their compensation

While many business owners rejoiced at the passage of the Ohio small business investor income tax deduction last year, many owners may not have realized that it presented an opportunity to take deductions on up to half of their compensation. This can result in significant tax savings to small business owners who otherwise believed they did not have business income sufficient to take much advantage of this tax break.

The small business investor deduction allows individuals to deduct 50 percent of business income included in the taxpayer’s federal adjusted gross income and 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). 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. If the business is structured as a pass-through entity and has multiple owners, each owner may be eligible to claim the deduction. Note that sole proprietorships also qualify.

What may not be clear to owners of pass-through entities is that guaranteed payments or compensation paid to them may also qualify for the deduction. Generally, guaranteed payments or compensation paid by a pass-through entity, which has tax nexus with Ohio to an investor holding at least a 20 percent direct or indirect interest in the entity, is considered a distributive share of income of the entity and is treated as business income. Since such payments are treated as qualifying business income in qualifying instances, these payments may be taken into account for purposes of computing the individual’s small business investor income deduction.

If you have questions as to whether compensation from your pass-through entity may qualify for this deduction, please contact us.

Indiana: Use tax assessed on pre-written computer software sales and GPS installed on vehicles

The Indiana Department of State Revenue (Department) has reiterated in its Letter of Findings 04-20130306 (Finding) the Department’s position that computer software sales are generally not subject to Indiana sales and use tax if the software is a custom program specifically designed for one purchaser. Pre-written computer software programs, even if the program requires some modification for a purchaser’s particular computer, are subject to Indiana sales and use tax. In addition, the Department also determined that GPS units installed on vehicles sold to consumers were subject to use tax when not separately itemized on invoices or separately bargained for in the transaction.

Custom or pre-written computer software

In this Finding, the taxpayer, an Indiana car dealership, was audited in 2010 and 2011. As part of such audit, the examiner determined that the taxpayer owed use tax on the purchase of internet-based information platforms and computer software programs used in its business because the taxpayer had failed to pay sales tax on such purchases.

The Department determined after a hearing that the taxpayer had not substantiated its claim that the purchase of the Internet-based information platforms and computer software programs represented the purchase of a service and not the purchase of tangible personal property subject to sales and use tax. The Department determined that the invoices the taxpayer provided to evidence its purchase of a service were either not sufficiently detailed to explain the underlying transaction or clearly demonstrated that the taxpayer purchased pre-written computer software. Consequently, the Department found that such purchases were subject to use tax.

GPS units subject to sales and use taxes

As part of this Finding, the Department also analyzed whether GPS units the taxpayer had installed on its customers’ vehicles, as a requirement of financing such vehicles, were subject to sales and use tax. The purpose of the GPS units was to permit the taxpayer to locate and repossess the vehicles if the customers defaulted on their car payments.

The taxpayer tried to argue that the GPS units were eligible for the sale for resale exemption from Indiana sales and use tax because the GPS units were installed and sold with the vehicle. The Indiana sale for resale exemption applies to exempt a sale from sales and use tax if the person acquiring the property acquires it for resale, rental or leasing in the ordinary course of such person’s business without changing the form of such property.

The Department explained that Indiana courts have found that the sale for resale exemption is only available if the taxpayer is able to demonstrate that it received itemized consideration for the item. In addition, Indiana courts have also provided that separate bargaining must occur between the customer and the taxpayer regarding that particular item.

In the Finding, the Department determined the taxpayer had failed to show it was selling the GPS units separately from the vehicles by listing the GPS units on the invoice for separate consideration. In addition, the Department stated that the taxpayer had not demonstrated that there was any separate bargaining for the GPS units. Consequently, the taxpayer’s purchase of the GPS units were subject to use tax because the taxpayer did not pay sales tax at the time of its purchase of the GPS units

The importance of substantiation

In this Finding, the Department ruled against the taxpayer because the taxpayer could not provide sufficiently detailed or itemized invoices to substantiate its arguments for why sales and use tax should not apply to its transactions. Therefore, this Finding clearly demonstrates how important it is to understand how local sales and use tax rules apply to your business so you can maximize your ability to be eligible for various local sales and use tax exemptions. 

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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