Taxes, Income and the Supreme Court
The United States Supreme Court has agreed to hear a case that has major tax implications. The central issue in Maryland State Comptroller v. Wayne is the extent to which states can tax income earned in another state by one of its residents. Maryland collects income tax at the state and county level. Residents are allowed to deduct income taxes paid to other states. However, the deduction doesn't apply to taxes collected by the county.
Brian and Karen Wynne held a stake in an S corporation which did business in 39 states. S corporations, like Limited Liability Companies and Partnerships, are pass-through entities which means income from the business can be applied to individual tax returns. Prior to deductions the Wynnes reported over $126,000 in Maryland state income tax. They claimed credits of more than $84,000 in taxes paid to other states. The Maryland Comptroller allowed the Wynnes to claim a credit from the state income tax but not the county.Read more
Focus on Texas
We’ve spent time recently blogging about changes in California. But, Miles Consulting also helps clients in other states , so we decided to dedicate some time on those as well. This week our focus is on Texas.
Business Climate:
Texas has long been considered a state that is friendly to business. Texas boasts that it is the state with the most exports – topping $279 Billion in 2013. It also lays claim to 52 of the Fortune 500 companies. http://www.texaswideopenforbusiness.com/business-climate/economic-strength.php Texas is a right to work state with low unionization, as well as low worker’s compensation rates. Major Texas industries include petroleum and natural gas, farming, steel, banking and tourism.
Taxes:
Texas is unique because the state does not impose a personal or corporate income tax, but instead relies on sales tax, property tax, and a franchise tax. The state’s current sales and use tax rate is 6.25%. In addition, cities, counties, special purpose districts, and transit authorities may also impose sales and use tax up to two percent for a total maximum combined rate of 8.25%. The franchise tax (also known as the “margin” tax) applies to partnerships (general, limited and limited liability), corporations, LLCs, business trusts, professional associations, business associations, joint ventures, incorporated political committees and other legal entities. If your annualized total revenue is less than or equal to $1,080,000, or your tax due is less than $1,000, you will owe no tax. All taxable entities must file a report, even if no tax is due. The following entities are not subject to the franchise tax: sole proprietorships and general partnerships directly and solely owned by natural persons. Read more
Introducing Miles Consulting Group
With this blog entry, I’m excited to announce Labhart Miles Consulting Group has been rebranded as Miles Consulting Group. We’ve launched a new website, and have a new logo design, as well as new company colors. Our ongoing dedication to high quality client service has not changed!
When Bill Labhart and I started Labhart Miles Consulting in 2002, our goal was to provide high quality, personalized service to a diverse client base. Over the last 12 years we’ve built a clientele that includes small businesses, technology companies, community banks, and Fortune 500 companies, among others. With the passage of time comes change and progress! Within the last year, Bill retired to spend more time with his family, we’ve dealt with some significant changes in the California tax credit program, and have witnessed increased discussion about the possibility of federal legislation that could change the multistate tax world as we all know it. I’m excited about the opportunities available during the next phase of the company!
The business name may have changed, but our level of commitment remains the same. We're excited to re-launch with a focus on four key areas: multi-state tax consulting, due diligence, credits and incentives and professional partnering.
Miles Consulting Group 4 Focus Areas:
Multi-State Tax Consulting
Does your business operate across state lines? If so, there are tax implications for both income tax and sales tax. Every state has its own set of tax laws and regulations. We can address a company’s multi-state tax issues before the auditor comes for a visit. We traditionally start with a nexus review to find out your level of exposure or compliance requirements. From there we can determine if your product or service is taxable for sales tax purposes and/or the proper apportionment of revenue for income tax purposes.
Due Diligence
As companies think about a merger, state tax due diligence can become an important part of the transaction analysis. Companies need to know what kinds of tax ramifications they might face ahead of time – not after the deal has been done. Proper due diligence (on either side of the transaction) can determine a target company's tax exposure and required level of compliance. These factors might not only shape the purchase price, they also impact your ongoing business related to bringing a target company into your company and systems. Remember, that a target company’s past history can continue to be your headache!
Credits and Incentives
For many years we specialized in the California Enterprise Zone Credit program. The state recently sunset that program in favor of three new incentives. We can assist your business in getting needed tax breaks both in California and in other states. States still offer a wide range of credits and incentives as they vie for businesses to locate (or stay) in their state. Among other things, your business may qualify for a hiring or investment credit or might be eligible for employee training reimbursement.
Professional Partnering
As state tax consultants, we are in a relationship business, working with our clients to get to the best overall answer for each situation. Many of our clients come to us by referrals from other professionals. And we, in turn, also refer our clients to our business partners. Oftentimes we receive referrals from CPAs, bookkeepers or attorneys who have valuable insight into particular facts or transactions, and have a unique history that can only benefit the client.
These are the core focus areas of Miles Consulting Group. Our experience with multi-state taxes, due diligence, credits and incentives and professional partnering make us a valuable resource for your business. You can find out more about our services by visiting the services area of our website.
We look forward to working with you!
Photo Credit: Crystal via Flickr
California's New Hiring Credit
In July of 2013, Governor Jerry Brown signed bills AB93 and SB90 which eliminated the former Enterprise Zone Hiring Credit and replaced it with the “California New Employment Credit” as of 1/1/14. The new 35% credit may sound good since an employee could generate up to $56,000 over a five year period (as opposed to the EZ at approximately $38,000 over a five year period), however, the New Employment Credit is much harder to qualify for and requires the employer to jump through many hoops in addition to burdensome documentation.
An eligible business must meet all the following requirements:
- Be located within a Designated Geographic Area (“DGA”). These areas are determined by the CA Department of Finance. The new designated areas will include the old Enterprise Zones, plus other specified census areas encompassing the state’s highest unemployment areas
- Be in an industry including: Manufacturing, Biomedical, Aerospace, and technology sectors, among others.
- Have a “net increase in number of jobs” over a base year.
The following are not eligible for the program: Retailers, food service, temporary employment agencies, casinos, bars, and sexually-oriented businesses. Note that small business (revenue less than $2million) can qualify for the New Employment Credit even within these industries (with the exception of sexually-oriented businesses).Read more
Sales Tax, Use Tax and the Marketplace Fairness Act
Sales tax has been in the news quite a bit lately. In previous posts I talked about the Marketplace Fairness Act. This proposed legislation would allow states more ability to collect sales tax from online retailers. Normally, a business can only collect sales tax if it has a presence in that state. The complementary use tax works to bridge that gap. Understanding the difference between the two taxes is important to understanding the current debate in Congress.
Use Tax Explained
There are two major components of a use tax. The first is that you or your business purchased an item (perhaps on-line from a vendor with no nexus in your state) without paying your home state's sales tax. Second, you intend to use, give away, store or consume that item in your home state. The use tax is complementary to the sales tax, and therefore the rate is the same as the residing state's sales tax. 45 states currently have a use tax. Businesses are generally able to report and remit the tax monthly or annually by filing a sales/use tax return. However, most individuals avoid paying the use tax because states rely on self-reporting. Herein lies most of the uncollected tax that states are so desperately seeking to collect.Read more
Coming Soon - CA Manufacturing Exemption
Those of you familiar with the old Manufacturers’ Investment Tax Credit may find the new California Manufacturing Exemption to be strikingly similar – but note that this version is a sales tax exemption versus a tax credit. The exemption reads much like the old statute and regulations under the Manufacturers’ Investment Tax Credit (“MIC”), which was a benefit from 1995 to 2003. (Yes – we’ve been around that long!) This new sales tax exemption is one of the three prongs of benefits that replaced the lucrative Enterprise Zone credits and deductions. For those of you not familiar with either incentive, we will give a brief overview of the new exemption this week.
The California Manufacturing Exemption begins July 1, 2014 and allows certain manufacturing and biotech companies to exempt from sales and use tax purchases of manufacturing and research and development (R&D) equipment. Purchased equipment or machinery must be used 50% or more during the manufacturing process. Equipment and machinery purchased and used for R&D qualifies as well. In any given calendar year, the combined amount of purchase must not exceed $200 million dollars. Any purchases beyond the $200 million threshold will not qualify. In addition, only part of the state tax portion of the sales tax is exempt. The exemption amounts to 4.1875% of the purchase price of qualified property. Since the exemption is partial, recordkeeping will be key!Read more
Marketplace Fairness Act – Who Does it Help?
Recently, our blog introduced the Marketplace Fairness Act and explained that it is a piece of proposed legislation currently being considered by Congress. In our first blog post, we dove right into the basics associated with the Marketplace Fairness Act, and today we continue uncovering more on the topic by introducing both pros and cons of the controversial act.
As a refresher, The Marketplace Fairness Act as currently proposed (but not yet passed) would allow states to enforce the collection of sales tax from remote vendors selling into their state, whether or not the retailer has nexus (taxable presence). Remote vendors include online and catalog focused sellers like Amazon and Ebay or “Mom & Pop” Internet retailers. Read more
California's New Tax Incentive? Jury Still Out.
California recently enacted a three pronged tax incentive program which benefits companies beginning in 2014. The newly established California Competes Tax Credit reached its first milestone, as the State accepted applications through the April 14, 2014 deadline. According to the California Governor’s Office of Business and Economic Development (“GO-Biz”), over 100 applications were received for the $30 Million in allocated credits for the fiscal year ending 6/30/14. The companies that applied on-line for the tax incentive will now be vetted by representatives from Go-Biz to see if they make it to Phase II and then ultimately receive tax credits. A hearing of the California Competes Tax Credit Committee is scheduled for June 19th in Sacramento to decide the final recipients.
So, what is the California Competes Tax Credit?
The California Competes Tax Credit is a recently enacted income tax credit available to businesses that plan to relocate to the Golden State OR for companies already in the state planning to expand California operations. Read more
Marketplace Fairness Act - Ebay, Overstock and Amazon, Oh My!
The Marketplace Fairness Act is a proposed piece of legislation recently being considered by Congress that has the heads of many spinning in confusion. In today's blog post, we introduce the basic details of the Marketplace Fairness Act and how it could affect you and your business if ultimately enacted.
3 Marketplace Fairness Act Questions:
1. What is it? The Marketplace Fairness Act is proposed legislation being considered by the US Congress that would allow individual states to encourage the collection of sales tax from remote vendors. Remote vendors include large online and catalog focused sellers like Amazon and Ebay, as well as smaller “Mom & Pop” internet retailers., which is the reason the proposed Act is controversial. It’s difficult to find a “one size fits all” solution. Read more
Commentary on the Demise of California EZ program
In the spirit of not being too negative or bitter, I have sat on my fingers for the last several weeks and purposely decided NOT to blog about the recent passage of AB93 – the California state law that eliminates enterprise zone benefits in our state. There are plenty of places that you go to find spin, one way or another around the “benefits” of the new law, but you won’t find that here. That’s because our business and our clients will be negatively impacted by passage of this law. Sure – that’s a little selfish of me, to think about me and my clients. But I also don’t buy that this new law is a benefit to very many businesses. In fact, I believe that, aside from the sales tax manufacturing exemption, very few companies will benefit at all. And I think that’s bad for business, bad for the California economy, and another check in the column that our state is not business-friendly.
Part of my frustration in the process is that this bill (a trailer bill that was blank in the hours after the passage of the budget earlier in June) was drafted, presented, and passed within the span of about 72 hours during the last week of June. The legislation (which still begs several administrative questions) was over 100 pages long. The ink on it was barely dry when the Democrat-controlled Senate voted on it. By the time the bill was voted on in the Assembly, the demise of the EZ program was already a “given” because supporters of the bill had strong-armed opponents and were weighing down heavily on those who would vote against it. A program that was alive, vibrant, and creating jobs in California was eliminated under a clever new bill promising "wonderful" new benefits to California businesses. It’s important to note that AB93 was a tax increase, needing a 2/3 majority in both chambers. It was a tax increase because deductions and tax credits were eliminated. In the press since then, there is little discussion of that fact. But, make no mistake, AB 93 takes away tax benefits = it’s another tax increase in California.
Quickly – the summary of the bill:
The only “good” part of AB93 - The bill implements a sales tax exemption for manufacturers for property purchased and used in the manufacturing process, beginning in 2014. As originally drafted and passed by the Senate, this exemption was to be only a five-year benefit, but in the final Assembly negotiations, it was extended to nine years. Such an exemption should have been in place years ago to put California on parity with most other states that already offer an exemption for manufacturing equipment. While many companies will benefit from this exemption, this law change was not related to hiring individuals and should not have been the catalyst for repealing the EZ program. Also, it sunsets. Shall we take bets whether it will be renewed after that time?
The bill repeals the existing EZ Hiring Credit, EZ Sales/Use Tax Credit and EZ Net Interest Deduction for Lenders as of 12/31/13. EZ credits generated will carry forward for ten years (rather than indefinitely) and EZ Hiring Credit benefits will continue to accrue until the qualified employee is no longer employed or reaches the full five years. But there will be no future benefits.
AB 93 "replaces" the EZ program with a statewide hiring credit with many limitations that will make qualification all but impossible for most employers. The new rules require all of the following:
- Companies must fall into qualified SIC codes (mostly manufacturing), and do NOT include retail and eating establishments;
- A net increase in new employees calculated by using a base;
- Qualified wages must be between $12.00 and $28.00 per hour, based on 150 and 350% of California's minimum wage; and
- Only full-time employees will be considered for the hiring credit and must qualify under one of four criteria (versus the 13 qualified criteria used now):
- Unemployed/displaced worker;
- A U.S. military veteran:
- An ex-offender; or
- Recipient of the Earned Income Credit.
To further add to the complexity, businesses seeking to claim these credits must request a "tentative credit reservation" with the Franchise Tax Board "FTB" within 30 days of the employee's date of hire, and must submit an annual "certification of employment" for each full-time employee to remain eligible for the credit during the 60-month credit period (With the many limitations and bureaucratic hurdles, we believe that very few companies will qualify for the credit. A perfect storm will need to be created for the credit to have any meaningful value to a company. We believe that the new program will not serve to increase or incentivize businesses to keep employees. It's simply a "program" so that the Governor can say that he has a hiring credit).
Finally, AB 93 creates a "slush fund" - currently a $30 million set-aside for negotiated incentives for which companies will compete if they expand business within the state. Company applications will be evaluated by a 5 member board established by the Governor. This fund is expected to grow to $200 million in future years. (One of the Governor's big objections to the EZ program was that it had some perceived abuses. He has now replaced it with a slush fund that will be overseen by only 5 individuals in a plan that is very short on details. If this is not a program that is rife for potential abuses, we're not sure what is. The projected cost of the EZ program, which benefited thousands of companies in every industry across the state, was estimated at $750 Million annually. With this legislation, the Governor has diverted a third of that amount into a very limited program, with limited oversight, potentially benefitting very few companies.)
We thank all of our clients and friends that reached out to legislators in the final hours of negotiations on AB93 and made their voices heard. Unfortunately, there weren't quite enough of us to convince the political machine in Sacramento to stop and reconsider this bill. But we applaud everyone's efforts!
