Does Seattle have an income tax?

The Seattle city council has enacted an individual income tax on Seattle “residents.” Residents is defined as someone with a “permanent place of abode” who spends 183 days or more there, or who “domicile” there. Whether anyone will have to pay the income tax is uncertain.

The 2.25% tax would apply on Gross income over $250,000 for single filers and $500,000 for married filers starting in 2018, with collection beginning in 2019.

Washington has no state income tax. It seeks to become the first municipality to impose an income tax in a state without one. The Tax Foundation says the Seattle tax faces an “uphill legal battle” because of doubts over its constitutionality and the authority of Seattle to pass such a tax.

The Seattle mayor is reported to be “eager” to be sued over the issue.

Given the likely legal challenges to a Seattle income tax, it may be premature to start planning for it. Still, it remains an issue to be watched closely by Seattle residents.

OH School District Income Tax: Failure to File Notices

The Ohio Department of Taxation began sending Failure to File notices by regular mail on June 5, 2017 to taxpayers who:

  • Have not filed an Ohio School District Income Tax Return Form SD 100 for 2013, 2014 and/or 2015; and
  • Appear to have lived in a taxing school district based on the school district number and/or mailing address reported on the taxpayer’s Ohio Individual Income Tax Return (Ohio Form IT-1040) filed for 2013, 2014, and/or 2015.

To learn more about the Ohio School District Income Tax, read their Guide.

If you receive(d) a notice and need assistance, please contact a member of our State and Local Tax Team.

 

Significant Changes in Louisiana for Income/Franchise & Sales/Use Tax

As a result of a $900 million budget shortfall, Louisiana lawmakers have passed the following tax measures aimed at bridging the revenue gap.  Some of the more important changes are as follows:

Income/Franchise Tax Changes (effective 1/1/2017):

  1. Expansion of franchise tax:
    1. “Domestic Corporation” now includes partnerships, joint ventures, and LLCs electing to be taxed as C Corporations for federal income tax purposes.
    2. Expansion of franchise tax nexus for out of state taxpayers – nexus for corporations that own interest in partnerships with Louisiana operations.
  2. Net Operating Loss (NOL) Reduction – NOL deduction cannot exceed 72% of Louisiana taxable income.
  3. NOL Carryover ordering – must use loss carryovers starting with the loss for the most recent taxable year. Older NOLs may expire since taxpayers would have to first use newer NOLs.
  4. Modification of corporation income tax rate to flat rate of 6.5% (contingent).
  5. Addback of intercompany interest, intangible expenses and management fees unless certain exceptions are met.
  6. Modification of federal income tax deduction (contingent).

Sale/Use Tax Changes:

  1. Effective 4/1/16 through 6/30/2018, the legislation increases the sales tax rate by 1% (bringing the rate to 5%).  Referred to as the “Clean Penny” Legislation, the legislation includes its own set of exclusions and exemptions apart from the exclusions and exemptions that apply to the original 4% sales tax rate (referred to as “Old Penny”).
  2. Old Pennies (the original 4% sales tax) – law modifies the list of exclusions and exemptions, specifically as they relate to the 2% basic rate (sub component of the 4% tax).  It is important to note the inconsistencies between the exclusions and exemptions offered under the Clean Penny and Old Penny laws.
  3. Affiliate Nexus provisions – the legislations drastically expands the definition of a “dealer.”

For additional background regarding the legislation, please visit the tax foundation website.

Question for the Court: Can States Tax Income Twice?

This article was updated to include arguments from Wednesday’s Supreme Court session and to clarify that the 1978 case involving Iowa had to do with taxing business income from certain sales.

The U.S. Supreme Court today heard arguments in a long-standing interstate tax dispute, the outcome of which could cost one state tens of millions of dollars and potentially shake up a fragile balance among states over how they tax their residents’ income when they earn it elsewhere.

The case comes out of Maryland, brought by a couple who sued over how the state taxed income they earned out of state. Maryland — like every other state with an income tax — offers a credit to taxpayers on their income tax bills for what they pay in taxes where the income is earned.

But unlike the others, Maryland’s credit is only partial. It offers no credit on a small part of its income tax that is distributed to counties, meaning that its residents pay taxes on the same income twice.

The plaintiffs in the case say the practice is unconstitutional, citing a string of cases that have generally blocked so-called double taxation, often in the name of protecting interstate commerce. The argument is that through its double taxation, Maryland creates an incentive for its residents to work only in Maryland.

During Wednesday’s arguments, Chief Justice John Roberts and Justice Samuel Alito seemed troubled by the potential threat to interstate commerce. Alito cited a submitted brief arguing that Maryland’s tax “operated exactly like a tariff.” Roberts later said that if every state did what Maryland did, “that sounds to me like a tariff.”

But the acting solicitor general of Maryland, William Brockman, said his state should not have to change its tax practices in deference to those of another state, even if there is a concern over double taxation.

“There is no reason a state should have to subordinate this taxing power,” Brockman told the justices. Further, he added, “Maryland is not required to provide a credit at all.”

Justice Antonin Scalia seemed to welcome the point. “That’s my problem with this,” he said, referring to the thinking that one state would have to give in to another’s tax decision. Scalia said opponents were citing “imaginary” constitutional arguments to back up their claims.

The U.S. and Maryland chambers of commerce, the Tax Foundation and the American Legislative Exchange Council (ALEC), which lobbies for conservative causes, agree with the plaintiffs. Maryland, the federal government, the Multistate Tax Commission (a membership group of state departments of revenue) and others defend the practice. Click here for a full list of the briefs filed in the case.

For decades, states have operated under the assumption that double taxation is not allowed, hence their practice of offering credits for taxes levied by other states. But experts say the core question of whether states are forbidden from taxing income twice has never been truly settled.

As they see it, the uncertainty applies to every state’s tax system, and pits federalism and state sovereignty against principles of free trade that have governed more than two centuries of commerce among states.

“It’s a fundamental, foundational question,” said Bradley W. Joondeph, the associate dean for academic affairs at the Santa Clara University School of Law, who wrote his own preview of the case. “When you have a state being told that its income tax system, which is in many respects critical to its raising of revenue, is unconstitutional, that’s something that’s going to get the court’s attention.”

Click here to continue reading…

Same Sex Tax Guidence

The Tax Foundation has come out with a comprehensive summary on state guidance for same-sex couples  who are filing joint federal tax returns for 2013.
The summary can be found here:

States Provide Income Tax Filing Guidance to Same-Sex Couples