Ohio CAT Tax and the Bright-Line Presence Standard:
The Ohio Board of Tax Appeals recently upheld the “bright-line presence” nexus standard with regard to the Commercial Activity Tax (CAT). In two similar cases, retailers (Newegg, Inc. and Crutchfield, Inc.) with no physical presence in Ohio were assessed the Ohio CAT on the basis that each had each gross receipts from sales to customers in Ohio that exceeded $500,000. The Ohio CAT is imposed for privilege of doing business in Ohio, based on having “substantial nexus” with the state. Out-of-state taxpayers have substantial nexus if any of the following applies at any time during the tax year:
1. Property in Ohio of at least $50,000
2. Payroll in Ohio of at least $50,000
3. Gross receipts in Ohio of at least $500,000
4. 25% of its total property, payroll or gross receipts in Ohio
5. The taxpayer is domiciled in Ohio
Other states that currently have “bright-line presence” nexus standards for determining nexus for purposes of imposing corporate taxes on out-of-state taxpayers include: California, Colorado, Connecticut; Michigan; and New York (effective for tax years beginning after 2014).
Indiana New and Updated Tax Credits:
Governor Mike Pence has signed the State Biennial Budget Bill, which enacts new corporate and personal income tax credits and makes changes to existing corporate and personal income tax credits.
Effective January 1, 2015, a credit is enacted against the personal income tax for individuals employed as teachers for $100 or the total amount expended on classroom supplies during a taxable year. The credit cannot be carried forward or back and the credit amount cannot exceed the amount of the individual’s income tax liability for the year.
The tax credit for natural gas-powered vehicles is amended, retroactive to January 1, 2013, to state that the tax credit is applicable to tax years after December 31, 2012 (previously December 31, 2013). Further, the maximum credit per person is amended to state that it does not apply to a tax year beginning after December 31, 2012, and before January 1, 2014. Also, for a vehicle placed into service in 2013, a person can only claim a credit against any state gross retail tax and use tax liability incurred by the person on transactions occurring after June 30, 2015, that involve a natural gas product.
The economic development for a growing economy tax credit is amended to state that, effective July 1, 2015, the aggregate amount of credits that may be awarded in the state for projects to create jobs in Indiana is limited to $255 million. The restriction expires July 1, 2016.
The historic rehabilitation credit is amended to state that, after June 30, 2016, the amount of credits available will be zero dollars and that no further projects can be certified. In its place, the new bill establishes a historic preservation grant program.
The amount of the headquarters relocation tax credit is increased from the current $7.5 million to $8.5 million after July 1, 2015, and $9.5 million after June 30, 2016.
Indiana Biennial Budget Bill Enacts New Tax Amnesty Program:
The recently signed State Biennial Budget Bill will require the Indiana Department of State Revenue to establish a tax amnesty program for taxpayers having an unpaid tax liability for a listed tax that was due and payable for a tax period ending before January 1, 2013. This new amnesty program will not be eligible to a taxpayer
(1) for any tax liability resulting from the taxpayer’s failure to comply with the gross income tax provisions with regard to riverboat gambling wagering or the slot machine wagering taxes or
(2) If the taxpayer participated in a previous amnesty program.
The amnesty program is limited to an eight-week period as determined by the department, ending no later than January 1, 2017. The department is authorized to adopt emergency rules to carry out the tax amnesty program.
Indiana Eliminates Throwback Rule:
Under Indiana’s current law, for purposes of calculating Indiana’s sales factor/apportionment, sales of tangible personal property shipped from Indiana are to be sourced (thrown back) to Indiana if the taxpayer is not taxable in the state of the purchaser. Effective for tax years beginning after December 31, 2015, this provision has been eliminated with the enactment of S.B. 441 on May 6, 2015.
The Shift to Market-Based Sourcing of Sales Continues:
In May, Missouri became the latest state to pass legislation requiring market-based sourcing for sales of services. Therefore, sales of services are attributed to Missouri to the extent that the ultimate beneficiary of the service is located in the state, regardless of where the service is performed. Missouri Gov. Jay Nixon stated that this “state law will ensure a level playing field for technology and service-based companies.”
Market-based sourcing has now been adopted in 20 states and states proposing market-based sourcing legislation in 2015 include Indiana, Kentucky, Mississippi, New Mexico, and Tennessee. With almost half of the states turning to market-based sourcing, this increases the potential of multiple taxation on the same sales dollars. One of the driving forces of this switch is the belief that as our society becomes increasingly service-based due to advances in communication and computer technology, the allocation of sales based on where the service is performed does not accurately reflect the taxpayer’s market. Market-based sourcing is seen as a method for states’ to increase their tax base.
As states continue to move to market-based sourcing, taxpayers doing business in multiple states need to be aware of numerous important considerations that vary by state. These considerations include where the benefit is received, where the service is received, how the service was delivered, and where the customer and billing address are physically located. Please contact Somerset if you would like assistance in navigating through the increasing complexity of Market-Based sourcing.
Credits and Incentives for Start-ups and Technology Companies:
New York: There are two main programs that attract start-ups and technology companies in NY. Targeted at medical science, technology and manufacturing companies, the START-UP NY Program has designated tax-free zones across the state that wave business, corporate, sales, property, state and local taxes, as well as income tax for entities and employees for ten years. Currently, there are 55 businesses that are part of this initiative. Another program called the Excelsior Jobs Program has four credits, a payroll credit, an investment tax credit, income tax credit for R&D activities and a real property credit.
Louisiana: The state offers credits of up to 40% of R&D expenses, and a 35% credit on in-state wages interactive media and software development activities. There is also the Louisiana Technology Park which hubs high-tech startups and assist with all areas of business operations. Louisiana also offers a 35% credit for venture capital investors for investment in eligible companies.
Connecticut: the state offers a 25% credit against state income tax to angel investors for investments of $25,000 – $1,000,000.
Kentucky: also offers an angle investor credit of up to 50% against individual income tax for investments into tech, advanced manufacturing and other hard-science related fields.