Crunch Time: New Tax Law Effect on Tax Returns Filed Before and After July 1, 2015

As previously reported, the Louisiana legislature passed a variety of bills modifying the state’s tax laws, many of which will be effective July 1, 2015. Given tax return filing cycles, these bills may affect tax returns not yet filed for prior years. Interestingly, these bills also specifically state that the laws, if signed by the Governor, are applicable on the effective date of the legislation regardless of the year to which a tax return filed on or after the effective date relates. Taxpayers should, while waiting to be sure the Governor has signed these, carefully review changes and consult their tax advisors to determine if filing returns or extensions before July 1, 2015 is beneficial.

Click here to view the Effect on Returns

Florida – Notice of proposed assessment is not a timely assessment for statute of limitations purposes

On June 11, 2015, the Florida Court of Appeal First District concluded that a Notice of Proposed Assessment (NOPA) is not an ‘assessment’ for purposes of Florida’s statute of limitations. Florida law generally requires that the Department may ‘assess’ an amount of tax within three years after the tax is due. The court determined that the assessment contemplated in the statute of limitations is a ‘final assessment,’ not a proposed assessment. The final assessment in this case occurred at the expiration of the 60-day protest period following the issuance of the NOPA, which was after the expiration of the statute of limitations. Accordingly, the court found that the Department’s assessment was untimely.

Although the tax at issue in this case was a sales tax, the court’s ruling appears to be applicable to income tax matters as well. Taxpayers that received NOPAs fewer than 60 days prior to the expiration of their statute of limitations period and are challenging an assessment should review whether the Department’s assessment is timely consistent with the guidance in this case.

Click here to continue reading: pwc-florida-proposed-assessment-not-timely-statute-limitations

Up-Front Capital Equipment Exemption – Law Change

Starting July 1, 2015, the capital equipment refund will become an up-front sales tax exemption.

To claim the exemption on eligible purchases, businesses must give the supplier a completed Form ST3, Certificate of Exemption. Use exemption reason code for “Capital equipment”.

Before July 1, businesses were required to pay sales tax when purchasing eligible capital equipment and then file a refund request with the Department of Revenue.

Note: If you pay sales tax on purchases after June 30, 2015, you may still file a refund request for tax paid in error.

For more information click here: FS103

Map of State Sales Tax Rates

This week’s tax map shows state and local sales tax rates in each state as of January 1, 2015 and comes from our larger report on sales taxes released earlier this week. While consumers might be aware of the statewide sales tax rate, local sales taxes can differ widely, so our population-weighted average allows for comparability across states.

LOST--2015

This ranking is useful for a state like Colorado, where the statewide sales tax is 2.9 percent (very low), but local sales taxes add on an additional 4.54 percent on average, meaning consumers face a combined rate of 7.44 percent, the 15th highest in the country.

The five states with the highest average combined state-local sales tax rates are Tennessee (9.45 percent), Arkansas (9.26 percent), Alabama (8.91 percent), Louisiana (8.91 percent), and Washington (8.89 percent).

The five states with the lowest average combined rates are Alaska (1.76 percent), Hawaii (4.35 percent), Wisconsin (5.43 percent), Wyoming (5.47 percent), and Maine (5.50 percent).

These rates are important because sales tax policy is one of the ways that states can compete. At the statewide level, businesses sometimes locate just outside the borders of high sales tax areas to avoid being subjected to their rates. A stark example of this occurs in the Northeast, where even though I-91 runs up the Vermont side of the Connecticut River, many more retail establishments choose to locate on the New Hampshire side to avoid sales taxes. One study shows that per capita sales in border counties in sales tax-free New Hampshire have tripled since the late 1950s, while per capita sales in border counties in Vermont have remained stagnant.

The state of Delaware actually uses its highway welcome sign to remind motorists that Delaware is the “Home of Tax-Free Shopping.” State and local governments should be cautious about raising rates too high relative to their neighbors because doing so will amount to less revenue than expected or, in extreme cases, revenue losses despite the higher tax rate.

State and Local Sales Tax Data for 2015

How does your state compare to its neighbors?
Washington, DC (Apr 8, 2015)—This morning, the nonpartisan Tax Foundation released an updated report of sales taxes throughout the states in 2015. Using a population-weighted average of local sales taxes, the report details the combined state and local sales tax rates for each state and explains how sales taxes fit into a state’s overall tax structure.
The key findings include:
• 45 states collect statewide sales taxes.
• 38 states collect local sales taxes.
• The five states with the highest average combined state-local sales tax rates are Tennessee (9.45 percent), Arkansas (9.26 percent), Alabama (8.91 percent), Louisiana (8.91 percent), and Washington (8.89 percent).
• Sales tax rates differ by state, but sales tax bases also impact how much revenue is collected from a tax and how the tax affects the economy.
• Differences in sales tax rates cause consumers to shop across borders or buy products online.
“Sales taxes are some of the most easily understood taxes because every time a consumer makes a purchase, they can see the rate on the receipt,” says Tax Foundation Economist Scott Drenkard.
Our study addresses the fact that 38 states allow local governments to levy sales taxes within their jurisdiction. These local rates, when combined with the statewide rates, can result in substantially larger tax bites.
“Of course, sales taxes are just one part of an overall tax structure and should be considered in context,” adds Drenkard. “For example, Washington State has high sales taxes but no income tax; Oregon has no sales tax but high income taxes. While many factors influence business location and investment decisions, sales taxes are something within policymakers’ control that can have immediate impacts.”
Full report: http://taxfoundation.org/article/state-and-local-sales-tax-rates-2015

U.S. Tax Court Finds Refundable State Credits Result in Taxable Income

The United States Tax Court recently determined that certain refundable tax credits issued by New York in connection with economic development activities (EZ Credits) constituted taxable income to the recipients for federal tax purposes. Maines v. Comm’r, 144 T.C. No. 8 (Mar. 11, 2015). In reaching this determination, the Court noted that the characterization of certain of the EZ Credits as refundable taxes for New York purposes “is not necessarily controlling for federal tax purposes;” instead, the Court looked at the substance of the EZ Credits and determined that the credits were not actually a refund of previously paid state taxes, and, instead, the credits were a taxable accession to wealth since they were “just transfers from New York to the taxpayer—subsidies essentially.” The Court also considered one other refundable tax credit (the QEZE Credit), which was a credit against income tax liability for the amount of real property taxes paid, and determined that, while the amount of QEZE Credits refunded did not constitute a “taxable accession to wealth” as did the EZ Credits, the application of the tax benefit rule mandated that the refundable portion was subject to federal taxable income.

The taxpayers received the EZ Credits from New York for engaging in specific economic development activities in the state through their pass-through business entities. As the Court noted, New York labels the EZ Credits “credits” and treats them as refunds for “overpayments” of state income tax; the taxpayers in Maines received refunds of their state income tax based on their claim for the EZ Credits. Despite New York’s characterization of the EZ Credits, the Commissioner asserted that they were nothing more than cash subsidies, and thus should be treated as taxable income to the taxpayers. On the other hand, the taxpayers argued that New York’s label of the EZ Credits as overpayments was binding for purposes of federal law. The Court, noting President Lincoln’s famous quip that “if New York called a tail a leg, we’d have to conclude that a dog has five legs in New York as a matter of federal law. . . . Calling the tail a leg would not make it a leg,” agreed with the Commissioner, observing that federal law looks to the substance of legal interests created by state law, not to the labels the state affixes to those interests.

As for the QEZE Credit, the Tax Court agreed that it did not result in a taxable accession to wealth since it was really a refund of real property taxes that the taxpayer had paid to the state. However, the Court still determined that the refunded amounts would be taxable due to the tax benefit rule to the extent that a deduction had been claimed for the real property taxes paid. Under the tax benefit rule, to the extent a taxpayer obtains a refund of payments for which it received a tax benefit (such as a deduction), such refund should be taxable.

The Maines decision is one of the first Tax Court decisions to address the taxability of refundable state tax credits. After the issuance of this decision, taxpayers should analyze the effect that a refundable state tax credit will have on their federal taxable income. In making such an analysis, a taxpayer must pay careful attention to how the credit operates and not to the labels that a state uses. In addition, in determining the benefit of any potential state tax credit, taxpayers should consider the result of this decision and determine whether they lose some of the anticipated benefit they were expecting.

Tax News Flash: CA Competes Tax Credit

The California Competes Tax Credit is an income or franchise tax credit available to businesses that come to California or stay and grow in California.

Applications for the California Competes Tax Credit will be accepted at calcompetes.ca.gov from March 9, 2015, until April 6, 2015.

Go to business.ca.gov for more information on the California Competes Tax Credit.