2017 Year-End State Updates
Selected state by state summaries of new laws and opportunities.
California’s Other State Tax Credit (“OSTC”):
The OSTC alleviates double taxation when income is taxed by both California and another state. The tax liability paid to the other state is allowed as a credit against California net tax, less other credits, but cannot be applied against California alternative minimum tax.
The California Franchise Tax Board (FTB) has established a multi-pronged approach to decide whether tax paid to another state will qualify for an OSTC. This approach is determined using California tax principles, rather han the other state’s characterization. When analyzing a tax, the FTB will look to the activities and the potential tax base to which the tax applies.
The determining factors are:
- Whether the tax is on (or measured by) income.
- Whether the tax is properly characterized as a net income tax.
- Whether the tax is imposed by and paid to the state.
Swart Enterprises, Inc. Ruling: In the California Court of Appeal ruling on Swart Enterprises, Inc. v Franchise Tax Board, the FTB’s expansive interpretation of “doing business” was rejected, and the court ruled in favor of Swart Enterprises, granting the company a refund of the $800 annual franchise tax, plus interest and penalties. “Doing business” has been defined as “actively engaged in any transaction where the motive and intent is for the financial or pecuniary gain or profit.”
The FTB has adopted a narrow view of the ruling and will only grant refunds and relief to those taxpayers whose factual situation meets the following specific criteria cited in Swart:
- An out-of-state corporation holding a 0.2 percent interest in a manager-managed California LLC doing business in California.
- The 0.2 percent interest was acquired after the original LLC members made the decision for the California LLC to be manager-managed.
- The original members delegated to a sole manager full, exclusive, and complete authority to manage and control the California LLC; and
- The out-of-state corporation’s sole connection to California was its ownership interest in the California LLC.
For 2016, Connecticut enacted a number of changes to the corporate income taxation scheme related to single sales factor apportionment and market-based sourcing. These changes were delayed one year for pass- through entities, until January 1, 2017. For the 2017 tax year, partnerships and S corporations will report CT income using single sales factor and market-based sourcing.
Retail Sales Tax:
In late 2016, the Florida Supreme Court upheld the constitutionality of a Florida statute which states that “Florists located in this state are liable for sales tax on sales to retail customers regardless of where or by whom the items sold are to be delivered. Florists located in this state are not liable for sales tax on payments received from other florists for items delivered to customers in this state.” The Court’s reasoning goes against what is usually thought of as sales tax, which is based upon changes of title and possession, the usual and customary foundation for sales tax. On February 21, 2017, the Supreme Court officially refused to hear the case; therefore, the original ruling by the Florida Supreme Court stands. The refusal by the court to hear the case opens origin-based sales tax to extend to other industries or other states.
2017 New Sales Tax Bill:
On May 25, 2017, Florida Governor Rick Scott signed a bill that included the following changes:
- The tax rate on the total rent or license fee charged on the rental of commercial real estate is reduced to 5.8% (from 6.0%).
- A sales and use tax exemption is created for data center owners who make a cumulative capital investment of at least $150 million.
- A refund process is allowed for when taxable admissions are purchased and resold to an entity exempt from sales and use tax (other than for resale).
- Sales and use tax exemptions are established for various goods related to women (effective January 1, 2018), animal, and aquaculture health care.
- For purchases of building material, pest control services, and rental of tangible personal property a back-to-school sales tax holiday is established.
Tax Rate Increases for Individuals and Businesses:
Effective July 1, 2017, the personal income tax rate increased from 3.75% to 4.95%, and the corporate income tax rate increased from 5.25% to 7.0%. The personal income tax rate is applicable to individuals, trusts, and estates.
Tax Breaks Disallowed for High- Income Taxpayers:
For tax years beginning on or after January 1, 2017, taxpayers will not be allowed to claim the standard exemption allowance or the Illinois Property Tax Credit if:
- Adjusted gross income exceeds $500,000 for returns with a federal filing status of married filing jointly.
- Adjusted gross income exceeds $250,000 for returns with a federal filing status other than married filing jointly.
Research and Development Credit is reinstated:
The Illinois Research and Development Credit was retroactively reinstated for tax years ending after December 31, 2015. Amended returns may be filed to claim the credit, if not included on the originally filed return. The Illinois R&D Credit is currently extended through 2021.
Sales Tax for Remote Retailers:
Effective July 1, 2017, retailers that do not have a physical presence in Indiana are required to collect and remit sales tax if the retailer, in the previous or current calendar year, has:
- More than 200 separate retail transactions in Indiana, or
- Retail revenue from any combination of the following transactions in excess of $100,000:
- Sale of tangible personal property delivered to Indiana.
- Product transferred electronically into Indiana.
- Services delivered in Indiana.
New Gambling Loss Deduction:
For tax years beginning on or after January 1, 2015, a deduction is allowed from Part B income for gambling losses incurred at certain licensed gaming establishments or “racing meeting licensee or simulcasting licensee” establishments, but only to the extent of winnings from such establishments included in gross income for the calendar year. The new gambling loss deduction is the only deduction for gambling losses allowed for a Massachusetts taxpayer.
Effective for tax years beginning on or after January 1, 2017, non-residents and part-year residents are no longer eligible for the tuition deduction.
Prepaid Tuition or College Savings Plan Deduction:
A new deduction is allowed in an amount equal to:
- Purchases of, or
- Contributions made in a taxable year to an account in a pre-paid tuition program or a college savings program established by the Commonwealth or an instrumentality or authority of the Commonwealth.
The deduction is capped at $1,000 for a single person or head of household and $2,000 for a married couple filing a joint return. The deduction applies to tax years beginning on or after January 1, 2017, through the tax year beginning on January 1, 2021.
Community Investment Tax Credit (CITC):
The Community Investment Tax Credit (CITC) provides a 50% tax credit against Commonwealth of Massachusetts tax liability. The CITC program is a refundable tax credit.
CITC is designed to enable local residents and stakeholders to work with and through community development corporations (CDCs) to partner with nonprofit, public, and private entities to improve economic opportunities for low and moderate income households and other residents in urban, rural, and suburban communities across the Commonwealth. CDCs accomplish this through adoption of community investment plans to undertake community development programs, policies, and activities. If the donor does not have sufficient tax liability, the credit is refundable, whereby the Commonwealth will issue a check for the balance of the credit to the donor. For more information, see (https://macdc.org/citc).
Taxation of Installment Sale Gains: Effective for tax years after December 31, 2016, upon the sale of assets, or of an S corporation or partnership interest that is operated in Minnesota, nonresident and part-year residents are required to recognize the gain on an installment sale on an accelerated basis, in the year of sale. However, nonresidents and part-year residents can elect to defer the gain and file Minnesota returns in years in which the gain is recognized for federal purposes. If taxpayers accelerate the recognition of the installment sale gains, that amount is excluded in the year it is recognized for federal purposes.
Change in Business Tax Rates:
The tax rate for the Business Profits Tax (BPT) and Business Entity Tax (BET) are being reduced over a number of years:
- For taxable periods ending on or after December 31, 2016, the BPT rate is 8.2% and the BET rate is .72%.
- For taxable periods ending on or after December 31, 2018, the BPT rate is 7.9% and the BET rate is .675%.
- For taxable periods ending on or after December 31, 2019, the BPT rate is 7.7% and the BET rate is .6%.
- For taxable periods ending on or after December 31, 2021, the BPT rate is 7.5% and the BET rate is .5%.
IRC Section 179 Deduction and State of NH Conformity:
- For property placed in service from January 1, 2017 – December 31, 2017, the maximum Section 179 deduction is $100,000.
- For property placed in service after January 1, 2018, the maximum section 179 deduction is $500,000.
- For property placed in service prior to January 1, 2017, the maximum section 179 deduction was $25,000.
Key Changes in This Year’s Budget Include:
1. Extension of the Millionaire’s Tax:
New York State’s highest marginal tax rate of 8.82% applies to taxable income in excess of $1,000,000 for single filers and $2,000,000 for taxpayers filing jointly. Commonly known as the “Millionaire’s Tax,” |this tax was set to expire at the end of 2017. The sunset date has now been extended to the end of 2019.
2. Extension of Charitable Contribution Deduction Limitation:
Certain limitations also apply to charitable deductions for taxpayers who otherwise are subject to the Millionaire’s Tax. The Federal charitable deduction is presently limited to 50% of the Federal deduction if taxable income is between $1,000,000 and $10,000,000. If taxable income exceeds $10,000,000, the maximum charitable deduction is 25% of the Federal deduction. These limits were set to expire at the close of 2017, but have been extended to the end of 2019.
3. Sale of partnership interests by non-residents may now be taxable.
4. For credit calculation purposes, disregarded entities are treated as individual taxpayers.
5. Curtailed Use of Related Entities to Defer Sales Tax:
The state changed its definition of retail sale to include certain purchases of tangible personal property for resale or lease to a related entity. This change will close a loophole that cost the state millions of dollars annually. Generally, if a party acquires tangible personal property and later resells or leases it, the initial purchase may be excluded from the definition of retail sale and the imposition of sales tax. Taxpayers have used this loophole by having one entity purchase high price tangible property, such as art, and then selling or leasing it to a related party at a lower price, or leasing it over a long period of time. This defers, and possibly reduces, the sales tax due New York. This legislation eliminates this opportunity for tangible personal property that is purchased for resale or lease to a related entity. Related entities generally include single member LLCs or disregarded subsidiaries, as well as sales to a partnership, which are then resold or leased to partners, a trustee who then sells or leases to a trust beneficiary.
6. Extension and Enhancements of Allowable Credits:
- A new Life Sciences Research and Development Tax Credit for qualified life science companies applies to tax years beginning on or after January 1, 2018.
- The Empire State Film and Post-Production Tax Credit is extended from 2019 to 2022.
- A new Empire State Apprenticeship Tax Credit is available to qualifying employers for employing qualified apprentices and applies to tax years beginning on or after January 1, 2018.
- The Alternative Fuel and Electric Vehicle Recharging Property Tax Credit is extended from 2017 to 2022.
- A credit for farm donations to food pantries has been established.
- Under new provisions, a single member LLC will be disregarded for purposes of eligibility for all corporate, business, franchise, personal income, or insurance corporation tax credits.
7. The STAR exemption has been converted into a tax credit for new homeowners.
8. eFile mandates have been extended.
9. The state will now conform with Federal tax return due date changes.
10. Income tax rate reductions for certain middle income taxpayers will be phased in starting in 2018 through 2025.
Change in Rates:
The corporate minimum tax will drop from $450 to $400 effective January 1, 2017.
Sales Tax – Ride Sharing Companies:
Effective July 1, 2016, transportation network companies are subject to sales tax on gross charges. A transportation network company includes an entity that uses a
digital network to connect riders to operators who provide prearranged rides.
Tennessee Broadband Accessibility Act (effective April 24, 2017):
The Tennessee Broadband Accessibility Act creates a credit against franchise and excise taxes equal to 6% of the purchase price of qualified broadband internet access equipment placed in service by a service provider in underserved communities. The credit is limited to 50% of the combined total franchise and excise tax reported on a return before application of the credit. Any unused credits can be carried forward 15 years.
Sales tax on food was cut from 5% to 4% beginning July 1, 2017.
Franchise and Excise Tax:
For tax years beginning on or after January 1, 2017, a qualifying Tennessee manufacturer doing business both in-state and out-of- state may elect to apportion its net earnings and net worth to Tennessee based on a single sales factor. In order to qualify, 50% of a taxpayer’s revenue from its activities in Tennessee must be from fabrication or processing tangible personal property for resale and consumption off premises. Once the election is made, it will remain effective for at least five years.
Hall Income Tax:
The hall income tax will be phased out over the next five years. The tax rate is reduced 1% per year for tax years beginning January 1, 2017, until it is repealed beginning January 1, 2021.
Use Tax Safe Harbor:
If taxpayers elect to report an amount of use tax liability that is a percentage of income, the rate of use tax is reduced from 0.20 % to 0.10 % of adjusted gross income, and a cap on use tax liability is set at $500 for total
purchases of items with a purchase price of $1,000 or less. The annual indexing of the rate is repealed. The use tax safe harbor is retroactive to January 1, 2017, and applies to returns filed for tax year 2017
Non-collecting vendors who make $100,000 or more of sales into Vermont in the previous calendar year must file with the Department of Taxes a copy of the notice sent to Vermont purchasers who have made $500 or more of purchases, stating the amount of purchases made from the non-collecting vendor in the previous calendar year. Failure to report to the department will result in a $10 penalty per failure, unless the vendor can show reasonable cause.
Captive Insurance Tax Credits:
When captive insurance companies are licensed for the first time, beginning on or after, January 1, 2017, they will receive a nonrefundable tax credit of $5,000 to be used against the first two taxable years for which they have a liability under the captive insurance premium tax. The existing tax credit was $7,500 and could only be applied to the first year of tax liability. The new tax credit will become effective on July 1, 2017.