State Effects and Reactions to Provisions of the New 2017 Tax Act
100% Expensing – Most states that currently follow federal depreciation rules will likely decouple from this provision creating large state depreciation addbacks for businesses with significant purchases of machinery and equipment. For states that have already decoupled, these businesses will see larger than normal addbacks and in the case of Pennsylvania, a potential 100% addback of the expensing amount. Per a December corporate tax bulletin, the Pennsylvania Department of Revenue indicates that no state depreciation would be allowed on the assets using 100% expensing and that the cost would not be recovered until the asset is sold or disposed.
$2.5 Million Section 179 Depreciation Cap – Like the 100% expensing, we would expect to see more decoupling from the federal tax law; creating larger depreciation addbacks.
20% Deduction for Individuals with Income from Pass-Through Entities – This new deduction will currently only affect the taxable income of six states. The remaining states either use federal AGI or gross income as a starting point or use their own calculation for income. It’s realistic that the six affected states would decouple from the provision and treat the deduction as an addback.
$10,000 Cap of State and Local Tax Deductions for Individuals – This does not directly affect states, but several, notably California and New York, have indicated that they will try to help taxpayers avoid the effects of this provision on their federal taxes. California has proposed allowing taxpayers to donate to a special fund giving the taxpayer a federal charitable deduction and a 1 to 1 state credit to offset their California taxes. While the IRS currently allows a charitable deduction for taxpayer donations that return state credits, no states have attempted to design a charitable donation with an attached state credit to purposely affect federal tax law. New York, along with a few other states, have indicated that they may try to move individuals’ state tax liabilities to employers in the form of a new employer payroll tax. It is unclear how exactly they would implement the payroll tax.
States Adopting Use Tax Notification Requirements For Remote Retailers
A number of states have adopted or are considering legislation implementing use tax notification requirements for remote retailers.
Colorado requires non-collecting remote retailers to notify consumers of their obligation to remit use tax to the state if sales tax was not collected at checkout. Other states have new laws that require vendors to report annually their sales to customers, and some states are taking it a step further, requiring the vendor to provide the state department of revenue with a list of customers and the total amount of their purchases.
The Washington state legislature enacted an election effective Jan. 1, 2018 for remote sellers that have at least $10,000 of sales into the state. Remote sellers may comply with the use tax notice and reporting requirements, choose to collect and remit sales taxes, or face significant penalties for noncompliance. Other states with legislation pending include Hawaii, Nebraska, and Wisconsin.
If you have remote sales in Alabama, Colorado, Louisiana, Oklahoma, Pennsylvania, Rhode Island, Vermont, or Washington, please talk to your Somerset advisor at 317-472-2170 or to learn if reporting requirements apply to your situation.
U.S. Supreme Court Takes Case That Could Affect Online Sales Tax
On January 12, the U.S. Supreme Court agreed to consider the case, South Dakota v. Wayfair, Inc., which challenges the Court’s 1992 decision in Quill Corp. v. North Dakota.
If the Court decides in favor of South Dakota, that decision would pave the way for all states to tax remote sales. If the Court decides in favor of Wayfair, Inc., the issue would remain unresolved although another state with economic nexus laws would likely challenge Quill. A ruling is expected by late June.
South Dakota’s economic nexus law was created in 2016 because the state determined there was an “urgent need for the Supreme Court of the United States to reconsider” the physical presence precedent set by Quill which reaffirmed that a state could only require a business with a physical presence in the state to collect and remit sales tax. Businesses lacking physical presence could not be required to collect or remit the tax.
This is a long awaited court case has possible impacts on all consumers and retailers.
As sales tax revenue, which accounts for over 30 percent of total state tax revenues, continues to drop due to an explosion in untaxed internet and e-commerce sales, a growing number of states have created economic nexus laws designed to tax sales by out-of-state sellers that lack a physical presence in their states. South Dakota, which has no income tax and relies heavily on sales tax, has been particularly affected by their inability to tax all internet sales.
Eight states, including South Dakota and Indiana, have now adopted economic nexus laws requiring out of state sellers to collect and remit sales tax. There are at least nine additional states considering economic nexus laws. Although the newly adopted laws vary state to state, in general the laws define economic nexus as occurring when a retailer’s in-state sales meet a specified transaction threshold (usually 200 separate transactions) or a dollar amount threshold. Court challenges have suspended these laws pending litigation.
Please follow our Somerset Tax Blog for the latest updates.
Ohio Department of Taxation Launches Amnesty Program Available through February 15
The Ohio Department of Taxation (Department) has launched its amnesty program to be administered from January 1, 2018 through February 15, 2018, for qualifying delinquent taxes administered by the Department (including Ohio’s sales, use, and commercial activity taxes) that generally were due and payable as of May 1, 2017. Under this program, tax amnesty may be granted to qualifying taxpayers for such eligible taxes, potentially permitting 100% waiver of the underlying penalties and 50% waiver of the underlying interest. The Ohio Department’s amnesty program website provides underlying program details and procedures.
Sales Tax Exemption for Research and Development Property
A significant revenue generator for each state is the collection of sales tax. In general, sales tax is to be collected by the seller of personal property unless there is an exemption allowed. One of the exemptions allowed is for the purchase of equipment to be used in the research and development activities of a buyer. In order to purchase R & D equipment exempt from sales tax, the buyer simply has to provide to the seller a signed and dated exemption certificate from the buyers state government form database.
Research and development property is described as tangible personal property that is acquired by the purchaser for the purpose of research and development activities. Activities include design, refinement, and testing of prototypes that lead to a new and enhanced project. Additionally, to qualify for the exemption, the property must be devoted to a research and development activity that is considered essential and integral to experimental or laboratory research and development. Consumables, hand powered tools and repair parts are exempt when used directly in the research and development activities.
Activities and purchases that do not qualify for the exemption are office buildings, heating and cooling of the R & D area, inventory control purchases, management supplies, marketing and training costs or other administrative functions and purchases.
Each state has their own sales tax exemption certificate. If you feel your purchases may qualify as research and development acquisitions, please contact your Somerset CPAs advisor at 317-472-2200 or and we can assist you in locating the proper state tax form to provide to your equipment supplier. Providing this exemption certificate to the seller could save you between 5% and 10% depending upon where your equipment will be placed into service.