Several states respond to U.S. Supreme Court decision on same-sex marriage
On June 26, 2013, in U.S. v. Windsor, the United States Supreme Court ruled that the Defense of Marriage Act, which defined marriage as between one man and one woman, was unconstitutional. This was significant for tax purposes because the subsequent Internal Revenue Service Revenue Bulletin provided that same-sex individuals who are lawfully married under the laws of a particular state carry that same status for federal tax purposes.
But confusion remained as to how these couples would file their state taxes in states that did not recognize same-sex marriage. The problem, as explained by the Tax Foundation, was that when states require taxpayers to reference their federal returns when filling out their state return, this creates a situation where the couples are both single and married filers, depending on the level of government. Action that the United States Supreme Court took on Oct. 6, 2014 is now forcing resolution of the problem.
The Court denied the certiorari petitions in which seven petitioners sought its intervention on lower court rulings that struck down state bans on same-sex marriage. This means that those lower court decisions, which affect tax returns in Utah, Virginia, Indiana, Wisconsin, and Oklahoma, will stand, according to SCOTUSblog.org. In a speech at the University of Minnesota Law School in September, Justice Ginsberg foreshadowed such a result when she indicated that there would be no need for the Supreme Court to rush to address these bans if the lower courts all ruled in the same way.
Here is the status of the tax updates in the affected states:
A recent Tax Foundation article (Article) reported that Utah will have an easy time adapting because its tax scheme already provided for same-sex marriage filers. On Jan. 15, 2013, the state issued a Tax Notice (Notice) providing that couples who are eligible to file a joint federal income tax return and who elect to file jointly, may also file a joint 2013 Utah Individual Income Tax return. This applied to eligible married couples wanting to file a joint return if they were married as of the close of the tax year. Utah limited its Notice to the 2013 tax year, but provided that if any taxpayers are required to file amended 2013 tax returns based on future court rulings, they will not be subject to penalties for any tax deficiencies resulting solely from following this guidance.
Though Utah has not yet updated its scheme for the 2014 tax year, it is likely the same rules that applied in 2013 will carry forward.
On Oct. 7, 2014, the state issued Tax Bulletin 14-7 (Bulletin), which declared that same-sex marriages that are valid under the law of any state will now be recognized for Virginia income tax purposes. Accordingly, same-sex couples who are legally married under any state law may file joint Virginia income tax returns, and compute items on their Virginia income tax returns as married individuals. Alternatively, such couples may file their Virginia income tax returns as married couples filing separately.
In addition, there is a retroactive tax effect. A same-sex married couple who filed a joint federal income tax return and separate Virginia income tax returns in a previous taxable year may, but is not required to, amend their Virginia income tax returns for any corresponding taxable years within the three-year statute of limitations to file joint Virginia
income tax returns. Any same-sex married couple electing to do so must compute items on their amended Virginia income tax return as married individuals.
The Bulletin repeals a previous one that required each individual in a same-sex marriage to file separate Virginia income tax returns, and also compelled such individuals to compute certain items on the Virginia income tax return as if they were single individuals.
Though Indiana has not yet issued any guidance, the Article reported that the Indiana Department of Revenue affirmed that its tax scheme would match Virginia’s.
On Oct. 13, 2014, the Wisconsin Department of Revenue updated its website by addressing questions regarding tax filings for same-sex couples. It confirmed that a same-sex couple that is considered lawfully married for federal tax purposes is also considered married for Wisconsin income tax purposes. Accordingly:
For 2014 individual income tax returns, a lawfully married same-sex couple must file their 2014 Wisconsin individual income tax returns as married filing jointly, married filing separately or, if qualified, as head of household.
- For 2013 and prior returns filed on or after Oct. 16, 2014, a lawfully married same-sex couple must file their Wisconsin individual income tax returns as married filing jointly, married filing separately or, if qualified, as head of household.
- For 2013 and prior returns filed before Oct. 16, 2014, a lawfully married same-sex couple who already filed their tax returns may choose (but are not required) to amend their Wisconsin tax returns using Form 1X, claiming a filing status of married filing jointly, married filing separately or, if qualified, as head of household. Prior returns may be amended as long as the statute of limitations has not expired.
On Sept. 27, 2013, the Oklahoma Tax Commission issued a public notice acknowledging that because the state did not recognize same-sex marriage, same-sex couples could not file a joint state income tax return. This meant that if a taxpayer’s federal filing status of married filing jointly or married filing separately is pursuant to Internal Revenue Service Ruling 2013-17 (which allows same-sex married couples to file a joint federal income tax return), each taxpayer must file a separate Oklahoma return as single or head of household, as applicable.
The Supreme Court denial changes all of this, and married same-sex couples can file jointly now, but the state has not issued any formal guidance as of yet.
Other states affected
The Tax Foundation Article pointed out that in addition to the above mentioned states, the Supreme Court’s inaction will have an impact on the tax lives of same-sex couples in the other states that are part of the circuits for which these decisions are now binding law: North Carolina, South Carolina, West Virginia, Kansas, Wyoming, and Colorado.
North Carolina has not yet issued its directives for same-sex married filers. Even so, on Oct. 15, 2014 a News Herald article reported that same-sex couples who are taxpayers in North Carolina but who were married in another state before the judge’s ruling will be able to file joint returns for 2013, if they haven’t already, and depending on when a couple was married, tax returns can be amended for up to three years. The options for married couples filing tax returns, both heterosexual and homosexual, are “married, filing jointly” or “married, filing separately.”
South Carolina does not recognize same-sex marriage. But one consequence of the Supreme Court decision will be that it, too, will be required to conform with federal rules, though it has not yet issued formal guidance.
West Virginia issued an Oct. 14, 2014 Administrative Notice that beginning with tax year 2014, tax returns will be processed without regard to gender or sexual orientation of the married partners. Individuals filing an amended return showing change in filing status from single to married must have been lawfully married during the relevant tax year for which the change in marital status is being sought. Accordingly, the terms “spouse,” “husband and wife,” and “wife” include an individual married to a person of the same gender. The term “marriage” includes marriage between individuals of the same sex, lawfully married under the law of any domestic or foreign jurisdiction having the legal authority to sanction marriages.
Kansas’ Constitution provides that “[m]arriage shall be constituted by one man and one woman only.” The Supreme Court’s denial will require Kansas to cease enforcement of this and related laws, though the state has not yet issued tax guidance.
Wyoming has no state income tax, so it is unaffected.
Colorado, which already allows same-sex marriage, is already in conformity with the federal tax rules.
Minnesota: Ranked #7 in cigarette excise tax rate in 2014 and #14 in smuggled cigarettes, will increase cigarette tax rates in 2015
Sales and excise taxes are slightly different animals. A sales tax is one that the government imposes at the point of sale on retail goods, like clothing. The retailer collects the tax and passes it on to the state. In contrast, one pays an excise tax on purchases of specific goods, such as gasoline and cigarettes, and it is often included in the product’s price. Many products carry both.
The Minnesota Department of Revenue has announced increases on sales and excise taxes on cigarette purchases. Effective for sales on or after Jan. 1, 2015, the cigarette sales tax will increase by 1.4¢. The state’s formula for calculating this tax results in an increase from the current rate of 51.2¢ to 52.6¢ per pack of 20 cigarettes. For packs with other than 20 cigarettes, the tax must be adjusted proportionally.
In addition, the Commissioner of Revenue has set the new excise tax rate at 145 mills, or 14.5¢ on each cigarette, also effective for sales on or after Jan. 1, 2015. This represents an increase of .35¢ from the current rate of 141.5 mills or 14.15¢ per cigarette. The new excise tax rate effective Jan. 1, 2015 will therefore be $2.90 per pack of 20 cigarettes, as compared to the current rate of $2.83 per pack of 20 cigarettes.
In a ranking of state cigarette excise tax rates, the Campaign for Tobacco-Free Kids shows that the average excise tax for all states is $1.54 per pack. Minnesota’s current rate of $2.83 per pack puts the state at seventh-highest. Chicago has the highest excise tax, $6.16 per pack (the state of Illinois is 17th at $1.98), and Missouri is the lowest, at $.17 per pack.
Aggregate revenue from cigarette taxes
According to North Carolina-based RJ Reynolds, the second largest tobacco company in the United States, cigarettes are one of the most heavily taxed consumer products in the country. Federal, state, and local governments collect more money from the sale of cigarettes than retailers, wholesalers, farmers, and manufacturers combined.
In fact, RJ Reynolds reports, since 1998, governments at all levels have collected more than $528.5 billion in cigarette taxes (including sales tax). For the fiscal year 2013, settlement payments, combined with federal, and state and local taxes on cigarettes amounted to more than $43.9 billion. Here is how those taxes break down:
Federal excise taxes: $14,166,973,085
- State and local excise taxes: $17,182,878,658
- State cigarette sales taxes: $4,043,504,916
- Tobacco settlement payments: $8,512,945,925
Avoiding cigarette taxes
The Tax Foundation notes that large differentials in the taxes imposed from one state to another create a black market for cigarettes. These “smuggled” cigarettes make up substantial portions of cigarette consumption in many states. In Minnesota, smuggled cigarettes account for 22.4 percent of total cigarettes consumed, which makes it the state with the 14th highest percentage of black market cigarettes.
Over/Under: States set interest rates for under and over payments of taxes for 2015
Michigan’s Department of Treasury issued Revenue Bulletin 2014-16 establishing the annual rate of interest due on underpayments and overpayments for the period beginning on Jan. 1, 2015 and ending on June 30, 2015. A daily interest rate of .0001164, based on an annual adjusted rate of 4.25 percent will be added to tax deficiency of excessive claims for that period. That 4.25 percent rate is one percentage point above the “adjusted prime rate” charged by three commercial banks to large businesses. This rate is unchanged from the last period of July 1, 2014 through Dec. 31, 2014.
Ohio’s interest rate on underpayments remains unchanged for 2015. Its interest rate is calculated by adding three percentage points to the federal short-term rate (rounded to the nearest percentage point) that was in effect during July of the current year. Based on this formula, the Tax Commissioner has determined that the rate will remain unchanged at three percent for calendar year 2015.
Also unchanged for 2015 is Ohio’s rate of interest which is applied to overdue estate taxes and tangible personal property taxes. The state calculates that rate by rounding the federal short-term rate to the nearest percentage point, which yields an interest rate of zero percent.
The Maryland Comptroller's Office has set the interest rates for refunds and delinquent taxes. The annual interest rate for overpayments and underpayments of taxes for calendar year 2015 remains at 13 percent.
The Iowa Department of Revenue announced that the annual interest rate for overdue taxes and refunds in 2015 will be five percent and the monthly interest rate will be 0.4 percent. This is also unchanged from 2014.
Like the other states, the West Virginia State Tax Commissioner has announced that the interest rates for tax underpayments, overpayments, and public contracts for the period Jan. 1, 2015 through June 30, 2015 will not change. The interest rate for tax underpayments will remain at 9.5 percent and the interest rate on tax overpayments, as well as on public contracts when final payment is delayed, will remain at eight percent. The interest rates apply to all taxes administered by the Tax Commissioner, including corporation net income, franchise, personal income, and sales-use taxes.
For additional information regarding these subjects or any other multistate tax issues, please contact:
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