Minnesotta Tax Cuts

On March 21, 2014 Minnesota Governor Mark Dayton signed and approved $508 million in tax cuts.

The bill included cuts for:
Married Couples
Business Sales Taxes

It also included changes such as:
Tax Credits for Innovation and Jobs
Angel Investor Tax Credit
Simplifying the Estate Tax
Eliminating the Gift Tax

For more detail visit:
Tax Breaks Now Law, What Minn. Taxpayers Need to Know

State and Local Income Tax Bracket Updates

The Tax Foundation has listed an updated list of state and local tax brackets.
Some key changes that they found for this year include:

  • State income tax systems have significant variation in structure, rates, deductions, and exemptions, including 9 states with no income tax on wages and 8 with flat income taxes.
  • North Carolina became a flat tax state, moving from three brackets to just one.
  • Massachusetts, another flat tax state, reduced its rate slightly.
  • Kansas, North Dakota, Ohio, and Wisconsin all made across-the-board income tax rate reductions relative to 2013 rates.
  • Minnesota added a high-earner tax bracket of 9.85 percent on income over $152,540 for single filers.

For a full list of changes visit:
State Tax Income Brackets for 2014 Update

March 31st Deadline for Montana Water’s Edge Election

The deadline to make or renew a Montana Water’s Edge Election for calendar year corporations is March 31, 2014. See below for specifics on election periods and requirements.

Montana’s corporate income tax regime requires members of a unitary business to report on a worldwide combined basis, unless a water’s-edge election is made. Under Montana law, taxpayers who elect water’s-edge reporting may exclude certain foreign affiliates from the combined return, in exchange for paying a higher tax rate. A water’s-edge group pays the tax at a rate of 7% on all taxable income for the taxable period as opposed to the regular rate of 6.75%.

A water’s-edge election made by a taxpayer is effective only if every affiliated corporation subject to Montana taxes consents to the election. Consent by the common parent of an affiliated group constitutes consent by all members of the group. An “affiliated corporation” is defined as a United States parent corporation and any subsidiary if more than 50% of the voting stock of the subsidiary is owned directly or indirectly by the parent or by another subsidiary of the parent whose income and apportionment factors must be included in a return under a water’s-edge election. An affiliated corporation also includes any corporation that is unitary with the taxpayer and that is incorporated in a tax haven. The following are considered tax haven countries under current Montana law:

Andorra, Anguilla, Antigua and Barbuda, Aruba, the Bahamas, Bahrain, Barbados, Belize, Bermuda, British Virgin Islands, Cayman Islands, Cook Islands, Cyprus, Dominica, Gibraltar, Grenada, Guernsey-Sark-Alderney, Isle of Man, Jersey, Liberia, Liechtenstein, Luxembourg, Malta, Marshall Islands, Mauritius, Monaco, Montserrat, Nauru, Netherlands Antilles, Niue, Panama, Samoa, San Marino, Seychelles, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Turks and Caicos Islands, U.S. Virgin Islands, and Vanuatu.

Other affiliated corporations which may be included are DISCs and FSCs, export trade corporations, foreign corporations which derive gain or loss from real property interests in the U.S., and corporations incorporated outside the U.S. but which have 50% of their stock owned directly or indirectly by the taxpayer and more than 20% of their average payroll and property assignable to a location inside the U.S.

A taxpayer must file a Form WE – ELECT in order to make or renew a water’s-edge election. The filing of returns and paying of tax under the water’s-edge election method without the filing of a Form WE – ELECT will not be accepted as a valid election. Furthermore, the election must disclose the taxpayer’s identity and a complete listing of all domestic and foreign affiliates owned in excess of 50%. The taxpayer must also provide detailed explanations of affiliates excluded from the water’s edge group.

Currently, a corporate entity may make a water’s-edge election for a three-year period. Form WE – ELECT must be filed within the first 90 days of the first tax year for which the election is to become effective. Thus, if a calendar year taxpayer files an election by March 31, 2014, tax year 2014 will be the first year of the three year election. If the first tax period for which the election is to become effective is less than 90 days, the taxpayer will have until the end of the tax period to file the election. Retroactive elections are not permissible. The election is binding for the entire three-year period unless the taxpayer obtains permission from the Montana Department of Revenue to change its election.

Upon receipt of the Form WE- ELECT, the Department will either approve or deny the election request by marking the appropriate box on the face of the form. The form will be sent back with a letter from the Department either providing additional information regarding a valid water’s edge election or an explanation as to why the water’s edge election request was denied. If confirmation is not received within two weeks of submitting the request or by the deadline to make a valid election, the Department recommends taxpayers contact them as there may be a problem with the request.

May 1st Deadline to Apply for Discontinued SD Tax Credits

On February 12, 2014, the South Dakota legislature enacted House Bill 1070, which, among other things, set a date of July 1, 2015 to repeal key tax credits for the building of agricultural processing facilities, as well as large new business facilities (S.D. Codified Laws Ann. § 10-45b).

These refunds apply to the contractors excise tax and are allowed for:
• Sales and use tax paid for purchases or use of agricultural processing equipment
• Project costs incurred and paid within 36 months of a permit application for an agricultural processing facility project
• Large new business facility project costs that exceed $10 Million

Provisions included in the repeal set a May 1, 2014 deadline to submit refund claims associated with permits for construction. If a business does not file by the May 1st deadline then they are barred from any future refund eligibility.

Navigating 10,000 Sales Tax Jurisdictions

The number of sales tax jurisdictions in the United States has risen to 9,998 –up 300 from 2011. The table below breaks out the number of sales tax jurisdictions by state:

Total Sales Tax Jurisdictions, 2014
Alabama 791
Alaska 103
Arizona 131
Arkansas 370
California 231
Colorado 307
Connecticut 1
District of Columbia 1
Florida 56
Georgia 162
Guam 1
Hawaii 2
Idaho 9
Illinois 443
Indiana 1
Iowa 994
Kansas 428
Kentucky 1
Louisiana 341
Maine 1
Maryland 1
Massachusetts 1
Michigan 1
Minnesota 35
Mississippi 3
Missouri 1242
Nebraska 209
Nevada 18
New Jersey 2
New Mexico 142
New York 84
North Carolina 105
North Dakota 137
Ohio 96
Oklahoma 587
Pennsylvania 3
Puerto Rico 79
Rhode Island 1
South Carolina 41
South Dakota 251
Tennessee 125
Texas 1515
Utah 310
Vermont 12
Virginia 174
Washington 346
West Virginia 11
Wisconsin 70
Wyoming 23

Source: Vertex, Inc.
Despite simplification efforts on both the state and federal level, it would appear that the complexity of navigating sales tax in the United States has risen.

The Marketplace Fairness Act (MFA), a piece of legislation that would give states the authority to require remote sellers to collect and remit sales tax, overwhelmingly passed the Senate last year. Although it has been held up in the House of Representatives, pressure from numerous supporters is indicative that it, or future legislation, will eventually pass both houses. The MFA includes a provision that stipulates that certain simplifications must be made to a state’s tax code in order for states to qualify to collect online sales tax.

According to the Tax Foundation, an independent non-partisan tax research think-tank, in an attempt to convince Congress to allow jurisdictions to collect sales tax on interstate internet transactions, states have made the claim that they have simplified their sales tax systems. The Tax Foundation asserts that, while the number of jurisdictions within a state isn’t everything, “no matter how it’s measured, states haven’t yet fulfilled their promises to simplify their sales taxes.” Still, the likelihood that businesses will soon have collection liability on internet sales is becoming a more plausible reality as the MFA continues to gain traction.

Increased Payroll Scrutiny

The frequency of payroll audits has surged over the last five years and businesses are facing increased payroll scrutiny.

Most payroll audits have traditionally focused on whether or not a business is misclassifying an employee as an independent contractor, thus avoiding Social Security, Medicare and other payroll taxes. According to an article published last March by the Wall Street Journal entitled Payroll Audits Put Employers on Edge, “local businesses misclassify anywhere from 10% to more than 60% of their workers as independent contractors.”

Since the 2008 economic meltdown states have been springing into action to audit payroll taxes as a way to increase revenue. States are assessing hefty fines for misclassification. For example, Colorado passed House Bill 1301, which allows the Colorado Department of Labor and Employment to fine a business up to $5,000 for the first misclassification offense and up to $25,000 for subsequent offenses (Payroll audits increase as government seeks added revenue, Heather Draper, Denver Business Journal).

The increase in payroll audits has also been intensified by the Federal government. The U.S. Department of Labor has issued partnership agreements with California, Connecticut, Hawaii, Illinois, Iowa, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Montana, Utah and Washington to collaboratively investigate more than 6,000 employers for misclassifying employees. The U.S. Treasury estimates that if all employers were forced to properly classify employees it would result in $8.71 billion in added federal tax revenue over the next decade.

If an employer is misclassifying employees then they can take advantage of a voluntary disclosure program. The IRS is offering a Voluntary Clarification Settlement Program (VCSP) that allows employers to reclassify employees while minimizing look back, and waiving penalties and interest. Similar agreements may be negotiated at the state level.