Multistate Tax Update -- July 23, 2015

Chicago imposes new taxes on its residents

Sales tax

Last week, the Cook County commissioners raised the county sales tax by 1 percent, from 0.75 percent to 1.75 percent, in a 9-7 vote, NBCChicago reported. The board president blamed state lawmakers who failed to approve a pension reform plan that has been stalled for nearly two years. As it currently stands, she asserted, the county's pension fund is $6.5 billion short of its obligation to retired workers, and the debt continues to grow at a rate of $1 million a day. In addition, the increase bumps Chicago's total sales tax from 9.25 percent to 10.25 percent, making it the highest sales tax rate in the country.

NBCChicago reported that the increase could generate more than $300 million annually. During the first year, 90 percent of the revenue will go toward addressing the shortfall in the county government worker retirement system. In the second year, more than 70 percent will go toward the pension fund. Remaining revenues for both years will be used for infrastructure and debt.

According to the Tax Foundation, the 10.25 percent rate, effective Jan. 1, 2016, will vault Chicago to the top of a “dubious list” of major cities with the highest sales tax rates.

Even so, the 10.25 percent rate is not the highest of any city, “[t]hat distinction goes to a handful of towns in Tennessee, and one in Arkansas (with 12 percent combined rates), all with populations of a few thousand people or less. A smattering of small municipalities in Arizona, Louisiana, and Oklahoma also feature higher combined rates.”

Amusement tax

In a June tax ruling, the Chicago Department of Revenue (CDOR) determined that “the amusement tax applies to charges paid for the privilege to witness, view, or participate in an amusement…This includes amusements that are delivered electronically.”

Consequently, consumers who use their televisions, radios, computers, tablets, cell phones, or other devices to view electronically delivered television shows, movies and videos, listen to electronically delivered music, and play electronically delivered games, will soon be subject to the 9 percent amusement tax.

Consumers will be relieved to learn that this tax does not apply to the sales of such amusements, only to the rentals thereof, whether termed as subscription fees, per-event fees, or something else.

An Arstechnica article quoted a Chicago spokeswoman as saying that the city expects to take in $12 million per year due to this new tax ruling. Chicago will use the consumer’s billing address to determine whether to levy the tax or not. Edward Kleinbard, a University of Southern California tax law professor, remarked that he “had never heard of such a tax anywhere else in the United States.”

In a December 2014 article, addressing Chicago’s effort, the National Law Review pointed out that the Federal Telecommunications Act, 47 U.S.C. §152, preempts local taxation with respect to direct-to-home satellite services. For this reason, in 2009's DirectTV v. Treesh, the Kentucky Supreme Court struck down a municipality's attempt to tax DirecTV services, reasoning that "Congress's intent was not to spare the providers from taxation as such, but to spare national businesses with little impact on local resources from the administrative costs and burdens of local taxation in the myriad local jurisdictions where their services would be sold." The Chicago Department of Revenue’s attempt to direct tax consumers raises questions as to the constitutionality of the tax.

Personal property lease transaction tax

In a separate tax ruling, the CDOR established that when a customer, or lessee, pays a provider or lessor, for the ability to use the provider's computer to “input, modify, or retrieve data or information,” then the charge is for the customer's use of the computer, and is therefor taxable at the rate of 9 percent.

Examples of transactions subject to the tax are the following:

• Performing online searches of legal research databases
• Obtaining consumer credit reports   
• Obtaining real estate listings and prices, car prices, stock prices, economic statistics, weather statistics, job listings, resumes, company profiles, consumer profiles, marketing data, and similar information or data that has been compiled, entered, and stored on the provider's computer   
• Performing functions known as cloud computing services, such as word processing, calculations, data processing, tax preparation, spreadsheet preparation, presentations, and other applications available through access to a provider's computer and its software

Not subject to the lease tax are entertainment materials, like copyrighted books, music, and films, because they are not considered to be “data” or “information” within the language of the municipal code. Nor are charges for the storage of customer information.

Other exemptions include activities where the customer has little control of the provider’s computer, when the charge is for information transferred to the customer, or when access to the information is passive, like viewing a streaming movie or a stock market ticker tape.

According to the ruling, if the provider fails to collect the required tax, then the customer should file a return and pay the tax him or herself, directly to the CDOR.

South Carolina: Department of Revenue issues several advisory rulings to guide taxpayers

Expiration of tax liens

On June 25, 2015, the South Carolina Department of Revenue (SCDOR) issued an advisory Revenue Ruling 15-6 offering taxpayers guidance on when a tax lien expires.

Under the state law that addresses tax liens and property subject to seizure, a person who neglects or refuses to pay a tax liability, and any interest, penalties, costs, and the like associated with it, is subject to a lien by the SCDOR. The lien authorizes the SCDOR to seize, levy on, or sell the applicable real property, as well as bank deposits and all other property of the taxpayer.

The ruling provides that a tax lien filed by the SCDOR expires 10 years after it is filed with a clerk of court or register of deeds. After that time, it is no longer enforceable, and “ceases to be an encumbrance upon any property of the affected taxpayer.”

Abandoned building revitalization credit

In 2013, lawmakers enacted the Abandoned Building Revitalization Act to encourage the rehabilitation, renovation, and redevelopment of abandoned buildings located in the state. Characterized by the Charleston City Paper as a “magic wand,” the act offers owners of such properties an income tax credit of up to 25 percent of the expenses involved in rehabilitating any income-producing building that has been at least two-thirds vacant for five years or more. The threshold spending requirements depend on the area’s population. In Charleston, for instance, an owner would need to spend $250,000 to receive the tax credit, which is capped at $500,000.

The Charleston City Paper explained that the act was passed because “the abandonment of buildings has resulted in the disruption of communities and increased the cost to local governments by requiring additional police and fire services due to excessive vacancies. Many abandoned buildings pose safety concerns...and restoring these buildings to productive assets for the communities in which they are located [will] result in increased job opportunities."

With Revenue Ruling 15-7 issued on July 8, 2015, the SCDOR highlights differences between the credit provisions applicable to building sites placed in service before and after June 9, 2015, which come into play due to this year’s amendments to the Act. In addition, the revenue ruling provides guidance and examples pertaining to the income tax credit, a general overview of the property tax credit, and the special rules for buildings or structures listed on the National Register of Historic Places.

Textiles communities revitalization credit

Along these same lines, Revenue Ruling 15-8, also issued on July 8, 2015, helps taxpayers navigate the Textiles Communities Revitalization Act. Originally enacted in 2004, this law encourages private investment in and redevelopment of textile mill sites to “remove and alleviate adverse conditions, including disproportionate expenditure of public funds, unmarketability of property, area crime, and abnormal exodus of families and businesses in these communities.” As with the abandoned building revitalization credit, taxpayers who meet the requirements set forth under the Textiles Communities Revitalization Act are entitled to income tax or real property tax credits. Similarly, Revenue Ruling 15-8 provides information on the following:

1. Definitions and qualifications
2. Notice of intent to rehabilitate
3. Income Tax Credit
4. Special provisions and transitional rules
5. Transfer of credit and notification to the department
6. Property Tax Credit overview
7. Examples and additional guidance

Retail Facilities Revitalization Tax Credit

A third revenue ruling issued on July 8, 2015, Revenue Ruling 15-9, pertains to the South Carolina Retail Facilities Revitalization Act, enacted in 2006 and scheduled to be repealed on July 1, 2016.

The purpose of the Retail Facilities Revitalization Act is to create an incentive for the improvement, renovation, and redevelopment of abandoned retail facilities located in the Palmetto State. A qualifying taxpayer is eligible for either an income tax credit of 10 percent of the rehabilitation expenses incurred in rehabilitating the eligible site or a property tax credit of 25 percent of the rehabilitation expenses multiplied by the local taxing entity ratio for each local taxing entity that has consented to the property tax credit.

The income tax credit must be taken in equal installments over eight years beginning with the year the eligible site is placed in service.

The property tax credit can be taken against up to 75 percent of the real property taxes due on the eligible site each year for up to eight years, with the caveat that the entire property tax credit vests in the year that the property is placed in service.

Revenue Ruling 15-9, like the others, offers information on definitions and qualifications, the notice of election of the Income Tax Credit or Property Tax Credit, Income Tax Credit, the transfer of Income Tax Credit and notification to the SCDOR, and the Property Tax Credit overview.

States take action to facilitate new revenue opportunities in the craft beer trade

Background

In May, we wrote about various states’ tax policies pertaining to up-and-coming trends in the alcoholic beverage industry, including hard cider and powdered alcohol. Making headlines recently is another product, craft beer, which is the fastest-growing segment of a $102 billion market, according to Bloomberg. In particular, the nation’s growing thirst for India pale ale and imperial oatmeal stout is providing states with new revenue opportunities.

The Brewers Association defines a craft brewer as one that is small, independent, and traditional. Small connotes annual production of six million barrels of beer or less. Such production accounts for approximately 3 percent of U.S. annual sales.

Independent refers to the fact that less than 25 percent of craft brewers are owned or controlled by an alcoholic beverage industry member that is not itself a craft brewer. And by traditional, the association means that craft brewers have a majority of their total beverage alcohol volume in beers whose flavor is drawn from innovative brewing ingredients, like malted barley, and their fermentation, “craft brewers interpret historic styles with unique twists and develop new styles that have no precedent.”

The association estimates that the craft brewing industry contributed $33.9 billion to the U.S. economy in 2012. This is the total impact of craft beers in all three tiers of the system, breweries, wholesalers, and retailers, plus the non-beer products, like food and merchandise, which brewpub restaurants and brewery taprooms sell.

The craft brewing industry accounts for more than 360,000 jobs, of which 108,440 of the jobs are at breweries and brewpubs.

The association offers statistics that show just how far this industry has evolved. For example, in 1867, there were 4,000 breweries in the United States. In 1920 there were no breweries, and until 1984, the number remained under 100. In 1985, the industry began to grow, which it has done steadily since that time. Today, there are more than 3,464 breweries.

Here are few additional statistics offering insight into the economic impact of the industry:

• In 2012, the five states with the greatest per capita output were:
  • Oregon, with $448.56       
  • Colorado, with $436.50       
  • Vermont, with $418.57       
  • Maine, with $324.36      
  • Montana, with $315.37       

• In 2012, the five states with the greatest economic impact were:

  • California, with $4.7 billion       
  • Texas, with $2.3 billion       
  • New York, with $2.2 billion       
  • Pennsylvania, with $2 billion
  • Colorado, with $1.6 billion       

State actions to facilitate growth

Bloomberg notes that as it currently stands, craft beers are not sold directly to consumers. According to the chief economist of the Brewers Association, this system both protects and hinders the industry, “[t]he smallest brewers want to sell directly to bars and stores to build a large enough market share to attract a distributor. Once they have a distributor, they need the protections that the three-tier system provides against the beer giants.”

Various states have different kinds of limitations on craft breweries, which ultimately restrict their ability to collect tax revenues that are commensurate with the growing demand. For instance, the Association for Convenience & Fuel Retailing points to legislation in Illinois that would allow breweries to bypass distributors and retailers and sell products directly to consumers. State Rep. Sara Feigenholtz, sponsor of the bill, remarked, “[w]e just need to create a more fertile environment.”

In Florida, Gov. Rick Scott signed a law in May that allows customers to fill and refill 32, 64, and 128-ounce growlers (a malt beverage container) from taps at retail locations, such as convenience stores. The law enacts other regulations and requirements related to vendor-licensed brewers, malt beverage tastings, and malt beverage containers.

In New York, a tax credit that was effective June 1, 2015, gives cash back to small state brewers to boost growth. In a press release touting the 59 percent growth between 2013-2014 in the craft beer business, Gov. Andrew Cuomo noted that this tax credit, included in his recently passed budget, “expand[s] tax exemptions for tastings conducted by New York breweries, lowering costs for hundreds of craft producers and allowing them to better market their products and reinvest in their businesses.”

The press release also highlights the law that in November 2014 Gov. Cuomo signed the Craft New York Act, which reduces costs and increases the annual production caps for farm breweries and micro-breweries, from 60,000 to 75,000 barrels. At that time, Gov. Cuomo also launched two craft beverage grant programs: a $2 million Craft Beverage Marketing and Promotion Grant Program, and a $1 million Craft Beverage Industry Tourism Promotion Grant.

On the other hand, not all states are on board with the trend. In North Carolina, Bloomberg reveals that there is a culture clash between alcohol producers and religious groups, though it is abating in some areas. State Rep. Chuck McGrady, who wants to make it easier for craft brewers to sell directly to consumers, is taken aback because “[t]hey’re selling beer and wine and hard cider in a way I never expected to see them sold, and they’re viewed as family-friendly, good for the economy, and just another group of small business people.”

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

David M. Kall
216.348.5812
dkall@mcdonaldhopkins.com

David H. Godenswager, II
216.348.5444
dgodenswager@mcdonaldhopkins.com

Susan Millradt McGlone
216.430.2022
smcglone@mcdonaldhopkins.com

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