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EisnerAmper Blog

An EisnerAmper State And Local Tax Blog

Pennsylvania Governor Wolf Proposes Aggressive Shift in Tax Policy

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Wilk, MatthewMarch 5, 2015

By Matthew Wilk

In March 3, Governor Wolf made his first budget address, and his $30 billion budget proposal has a lot of moving parts. The various proposed changes to the tax code are driven by Governor Wolf’s initiative to better and more fairly fund the educational system, as well as address the significant pension and infrastructure issues facing Pennsylvania. A summary of the key proposed changes is as follows:

  • Personal Income Tax
    • Increase the personal income tax rate to 3.7% from 3.1%
    • Provide a threshold exemption level of income for low income taxpayers
     
  • Sales Tax
    • Increase the sales tax rate to 6.6% from 6.0% (the rate in Philadelphia will stay at 8.0%)
    • Broaden the scope of enumerated taxable services to include professional services (such as legal and accounting fees) and reduce exemptions
     
  • Corporate Tax
    • Institute a mandatory combined filing regime for corporate tax purposes
    • Incrementally reduce the corporate tax rate to 4.99% from 9.99% by the 2018 tax year
    • Reduce the NOL Cap to the greater of $3M or 12.5% of taxable income from $5M or 30% of taxable income (this goes against recent increases in the cap to be more taxpayer-friendly)
    • Terminate the capital stock/foreign franchise tax (once and for all)
     
  • Credits and Incentives
    • Restore and increase funding for a variety of credits and incentives to boast investment in manufacturing and employment in the commonwealth
     
  • Severance Tax
    • Institute an extraction tax of 5% on natural gas and  an additional tax on gas reserves
     

Approximately $1B of the tax increases are targeted to reduce local property taxes, and level the educational funding playing field by providing greater subsidies to the school districts that have a challenged tax base. Another significant chunk will be sent to Philadelphia to help expedite reductions in business, wage, sales, and property taxes. This is interesting as Philadelphia Mayor Nutter just proposed an almost 10% increase in the Philadelphia property tax rate to help plug the school district’s budget.  (This is on top of the 10% surcharge that was supposed to be temporary.)

The Governor’s proposals were instantly hit with skepticism by the Republican-controlled legislature. Which of these tax proposals will survive and be enacted in June/July/August is anyone’s bet, but what is certain is that there will be change starting with the 2016 tax year. 

New E-File Requirements in New Jersey, California

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February 13, 2015

Bingel, GaryBy Gary Bingel, CPA

New Jersey

In accordance with NJ Admin. Reg. Section 18:7-11.19, eff. 1/20/2015, all NJ taxpayers and preparers should be advised that beginning with tax years starting on or after January 1, 2015, all tax preparers must make all corporate business tax payments and filings electronically, including estimated payments.  Further, for tax years beginning on or after January 1, 2016, taxpayers that file their own corporate business tax returns must do so electronically, including making all payments electronically. 

Currently, the New Jersey Division of Taxation has yet to determine the proper method of electronic payment (EFT (ACH Debit/Credit), E-Check, or Credit Card).  Should the New Jersey Division of Taxation require EFT payments, the taxpayer must enroll in EFT online and select whether they are electing to use ACH Debit or ACH Credit. The taxpayer would then have to provide the routing number, bank account number, whether it is a checking/savings, business/personal, and their e-filing PIN, which can be requested online if a taxpayer does not have one, when enrolling in EFT.  This information would also have to be provided to the tax preparer.  If the New Jersey Division of Taxation allows any other form of payment, e-check or credit card, an enrollment would not be needed with these methods.  The tax preparer would only require the information applicable to these methods of payments.

At this point, the New Jersey Division of Taxation has yet to state or require a certain amount of funding time prior to the payments being transferred.  Currently, NJ requires that there be sufficient funds available prior to making a transfer, but they do not specify a time period prior to the transfer that the funds need to be made available. These and any other administrative issues are currently being addressed by the Division of Taxation.

California

In accordance with this California Legislative Information, effective January 1, 2015, California stated that for taxable years beginning on or after January 1, 2014, an electronic filing requirement was placed for business entities.  Any business entity return that is prepared using tax preparation software must be filed electronically.  However, California did not state an electronic payment requirement. California will still accept multiple methods of payment for businesses. The required entities include S Corporations, an organization exempt pursuant to Chapter 4 of Part 11, a partnership or a limited liability company.  A business entity may annually request a waiver of the requirements for electronic filing from the Franchise Tax Board.  The Franchise Tax Board may grant a waiver if it determines that the business entity is unable to comply with the requirements due to, but not limited to, technology constraints or due to other reasonable causes, and not willful neglect.   If a business entity that is required to electronically file a return fails to file electronically, they will be subject to a penalty in the amount of $100 for an initial failure and $500 for each subsequent failure unless the failure is due to reasonable cause, and not willful neglect. If a group return is filed on behalf of eligible electing taxpayer members of a combine group, the penalties would be applied to the combined reporting group and not the taxpayer of the reporting group. 


For any additional information, please refer to the California FAQ on California business e-file program.

NJ Add-Back of Certain Taxes Limited by Tax Court

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January 21, 2015

Gentilesco, BillBy Bill Gentilesco, CPA

In a recent court case (PPL Electric Utilities Corp. v. Director, Division of Taxation, New Jersey Tax Court, No. 000005-2001, October 2, 2014), the New Jersey Tax Court held that the Pennsylvania Capital Stock Tax (which is based on net worth) and the Pennsylvania Gross Receipts Tax (which is imposed on utilities) are fully deductible for purposes of computing a company’s New Jersey Corporation Business Tax (“CBT”) liability.
 

The CBT Act requires a corporation’s federal taxable income to be adjusted to include the add-back of certain state taxes.  Specifically, taxes paid or accrued or measured by profits or income, business presence or business activity must be added back.  The Tax Court concluded that the Pennsylvania Capital Stock Tax was not subject to the add-back because it was in substance a property tax.  Further, the court noted that the Pennsylvania Gross Receipts Tax was based solely on the amount of electricity sold by the plaintiff, regardless of whether or not profit is realized from such sales and not based upon a taxpayer’s business presence or business activity in Pennsylvania.  Thus, the Gross Receipts Tax was also not subject to the add-back.  A question remains whether taxpayers can use the PPL decision to avoid the CBT add-back for similar taxes imposed by other states.
       

If significant Pennsylvania Capital Stock or Gross Receipts taxes were added back on recent prior CBT returns, you should consider filing a refund claim with New Jersey.  The New Jersey time limit for refunds is generally four years from the date a CBT return is filed.  If you have any questions on the PPL case or wish to discuss a potential refund claim,  please contact your state and local tax advisor.

 

December Anti-Slumber: NYS Corporate Tax Changes and Resultant Action Items

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December 17, 2014

Allen_Jeffrey By Jeff Allen, CPA and Jennifer Banister

December has arrived, and that means two things: year-end parties and year-end tax planning.

As you are likely aware, New York State passed sweeping Corporate Income Tax Reforms .  As many of these changes are effective January 1, 2015, it is worth revisiting the major changes, and whether they require immediate action.

  1. Sourcing of New York Receipts from Services.  Starting in 2015 New York has adopted a market based “destination” sourcing method for receipts from services.  This is a significant change from the prior cost-of-performance method.  As a result, customer location will determine whether receipts from services are attributable to New York.  Previously, New York excluded gains from the sale of capital assets (i.e., property not held for sale in the regular course of business).  This is no longer the case.    
    • Action Item: For state apportionment purposes, corporations will need to start tracking their receipts from services based on a market sourcing approach, and evaluate the impact this change may have on its tax liabilities, as well as the related financial statement impact.
     
  2. Net Operating Losses (NOLs).  Previously, NOLs were limited to the federal NOL and computed on a pre-apportionment basis.  NOLs are now computed on a post-apportionment basis and are no longer limited to the federal NOL.  NOLs may now be carried forward for 20 years and carried back for 3 years.     Pre-2015 NOLs may still be carried forward but are calculated based upon transition rules providing for a “prior NOL conversion” (PNOLC) subtraction pool.  In effect, the PNOLC subtraction pool converts pre-apportioned NOLs incurred in years before 2015 to post-apportioned NOLs that are calculated at a 6.5% rate.  Any unused conversion subtraction may be carried forward through the 2035 tax year.  Alternatively, the law permits taxpayers to make a one-time election on a timely filed return for the tax year beginning on or after January 1, 2015, but before January 1, 2016 (the 2015 year for calendar year filers), to deduct 50% of the conversion subtraction pool over a two-year period.   However, if this election is made, any unused amounts are lost after the two-year period.
    • Action Item:  Assuming there are NOL carry forwards from prior years, these changes will require the corporation to determine the “prior NOL conversion” subtraction pool, which entities are included in the combined group for the “prior NOL conversion” subtraction pool, and the potential benefit of selecting the one-time election.
     
  3. Economic Nexus and Subjection to the New York Corporate Franchise Tax.    Previously, most taxpayers were only subject to the Corporate Franchise Tax if they had a physical presence in New York, with an exemption for companies whose only New York presence was a fulfilment center to store and ship inventory.  Starting in 2015, this exemption is eliminated and the Franchise Tax base will expand to include any corporation with more than $1 million in New York sourced gross receipts.  A corporate partner in a partnership operating in New York will also be subject to the Franchise Tax.
    • Action Item: This provision, coupled with the new sourcing rules for services outlined above, may subject many more services companies based outside of New York to New York taxation.  Thus, additional nexus analysis may be necessary if the service is performed in another state, and if the customer that benefits from the service is located in New York.  Further, non-service companies should also closely track their levels of New York sales if they are close to this threshold.
     
  4. Combined Reporting.  Under the new law, the rules for determining when related companies should file separate or combined tax returns have once again changed significantly.  Combined reporting is mandatory for unitary businesses where one taxpayer owns or controls more than 50% of the voting stock of one or more corporations.  This brings New York in line with the majority of other states and is designed to reduce controversy.  Additionally, taxpayers may choose to make an irrevocable, 7-year election to include all corporations meeting a more-than-50 % ownership test, including non-U.S. corporations with a permanent establishment in the U.S. or income that is effectively connected with the U.S.  This election should be carefully examined from a tax-planning perspective.
    • Action Item: In addition to reviewing their unitary relationships, corporations should carefully examine the advantages and disadvantages of the 7‐year election. Corporations should also address the inclusion of alien corporations. In many instances, the combined group will change.
     
  5. Other Changes.  For tax years beginning on or after January 1, 2016, the corporate net income tax rate will be reduced from 7.1 to 6.5% for most corporate taxpayers.  Small businesses can begin utilizing the 6.5% reduction in the 2014 tax year.  The new budget also, eliminates the Alternative Minimum Tax base, eliminates the deduction for income from subsidiary capital and creates new tax credits for certain industries.  Finally, “Qualified New York Manufacturers” are subject to a -0-% Business Income Tax rate.
    • Action Item: Companies should review their classification to ascertain whether they qualify as a New York Manufacturer, a Qualified Emerging Technology Company, or a Small Business.  They should also review the potential financial statement impact on items such as their deferred tax assets. 
     

Michigan Refund Opportunity

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July 18, 2014

Michigan Supreme Court holds in favor of Taxpayer’s use of the MTC’s equally weighted, three-factor apportionment formula

By Gary Bingel, Bill Gentilesco, and Matt Wilk

On July 14, 2014, the Michigan Supreme Court issued its decision in International Business Machines Corp. (“Taxpayer” or “IBM”) v. Department of Treasury, and decided in favor of the Taxpayer’s election to use the Multistate Tax Compact (“MTC”) equally weighted, three-factor apportionment method for the Michigan Business Tax including both the income tax and the modified gross receipts tax. The Court is not anticipated to accept the request for reconsideration, should there be one. 

This decision in Michigan follows the most recent decision in California’s The Gillette Company, et al. v. California Franchise Tax Board Case.  In California, the Court of Appeals also held in favor of the taxpayer’s use of the equally weighted, three-factor apportionment formula.  The decision in Gillette was appealed to the California Supreme Court and a decision is expected before the end of the calendar year.

 The Issue:

Today there are seventeen Member States of the Multistate Tax Compact.  The MTC default apportionment method is an equally weighted, three-factor apportionment formula of property, payroll and sales.  Over time, most of the MTC Member States have enacted apportionment formulas that are more heavily weighted to the sales factor, if not a 100% sales factor.  Both taxpayers in IBM and Gillette argued that the taxpayer was entitled to elect to use the MTC equally weighted, three-factor apportionment formula instead of the state’s default apportionment formula.  Since the taxpayers in these cases had lower percentages of property and payroll as compared to its sales in the state, the MTC apportionment formula resulted in a lower state tax liability. 

The Opportunity: 

Clients that have significant Michigan liabilities for the years the MBT was in effect (2008-2011) should analyze whether the use of the MTC’s equally weighted, three-factor apportionment formula would be beneficial and, if so, pursue claims for refunds.  The Michigan Supreme Court did not address whether the MTC is applicable to the new Michigan Corporate Income Tax, and thus there may be an opportunity to claim refunds for more recent tax years. 

In addition to California and Michigan, refund opportunities may also exist in other states.  Although the California and Michigan cases are not precedential in other states, they are persuasive evidence of the legal issues.  Therefore, there are opportunities in many of the MTC Member States to take the position that the MTC’s equally weighted apportionment formula is available for use. 

New Jersey Budget Brings About Important Tax Changes

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The newly enacted 2015 New Jersey State Budget delivers some good news, as well as some potentially bad news, for New Jersey taxpayers. Amid all the debate, Governor Christie vetoed two tax increases that were passed by the legislature and approved several new laws around tax provisions that could have lasting effects on taxpayers.

EisnerAmper state and local tax experts Gary Bingel, William Gentilesco and Matt Wilk weigh in on the four key changes set to take effect for tax years ending on or July 1, 2014, and explain how each one will impact New Jersey taxpayers and business owners in Several Key Changes to Existing New Jersey Tax Provisions.

 

NY Court of Appeals Holds Against Department of Taxation and Finance Position on Statutory Residence

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February 28, 2014

By Stephen Bercovitch


Bercovitch_SteveThe New York Court of Appeals has decided that a taxpayer’s subjective use of the premises is a key inquiry in determining “permanent place of abode” to be considered together with the degree that the taxpayer maintains living arrangements in particular premises.  This decision, in which the Court referred to the “statutory residence” provision of the tax law, is a reversal of the Department of Taxation and Finance’s position that property rights, suitability and unfettered access equate to “permanent place of abode.”   Find out more with our article titled “Major Decision on NY Statutory Residence Issued by Court of Appeals.”

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