States and local taxing authorities are offering businesses huge incentives to stay or move in rather than move on. The taxman’s impetus is job creation. If your company is thinking about moving your operations from one tax jurisdiction to another, consider the tax implications of the move first, and ways that you can use the move to improve your tax position.

Tax incentives play a key role in where a company chooses to locate and conduct business. Although online businesses benefit from the confusion around nexus, companies with a physical presence in a particular jurisdiction benefit from managing their tax burden. Tax opportunities could include negotiated tax reductions, credits, or other incentives as a condition of staying put or relocating to one place over another.

High unemployment coupled with tottering state and city budgets are giving businesses this one-off opportunity to negotiate for reduced tax obligations. In May 2011, the U.S. unemployment rate exceeded 9.0 percent, according to the U.S. Bureau of Labor Statistics. An estimated 8 million jobs have been lost during the recession.

State and local authorities are pursuing tax incentives to get people back to work. Employed people buy goods and services, own and rent homes, and keep local economies healthy. Businesses with as few as 50 employees may hold the bargaining power to extract large tax incentives in the form of reduced income, sales, and property taxes or even cash grants from taxing authorities in exchange for providing jobs.

Taxing authorities are particularly motivated to keep current employers in place and entice new employers to their area to establish training centers, manufacturing plants, and service outlets. For example, health insurance provider Cigna agreed to add at least 200 jobs in the next two years in Connecticut to earn a $50 million tax credit from a new Connecticut Department of Economic and Community Development program. Illinois provided Motorola more than $100 million in incentives over 10 years to retain is headquarters in Libertyville — employing 3,000.

Taxes are a big factor for business executives in deciding where to relocate, expand a business, or start a new business. Before signing your next lease or relocating, take some time to consider credits and deductions that may reduce your company’s tax burden and help you determine your company’s ideal location from a tax perspective.

1. Select tax-friendly locals based on listed tax rates

• Certain states are more tax-friendly for businesses than others. The five best state tax systems can be found in South Dakota, Texas, Nevada, Wyoming and Washington. None of these states have personal income tax or corporate income tax rates. Among the worst states in the union to do business are California, Maine, Iowa, New York, New Jersey, and Minnesota.

• Certain counties within states are more tax-friendly for business than others. From a sales tax perspective in Colorado, for example, the county portion of the sales tax rates in Arapahoe, Jefferson, and Adams counties are among the lowest in the state.

2. Negotiate tax incentives

If you are serious about moving your operation from one jurisdiction to another, try negotiating with tax authorities where you are and where you might want to be to take advantage of the best tax situation for the location you end up choosing.  Tax incentives can be in the form of reductions to income, sales, or property taxes through a reduction in the tax base, tax rate or both.  Additionally, a state or local jurisdiction could offer certain types of tax credits as incentives to relocate in their area.  For companies that are unable to take credits directly against income tax, some types of credits are allowed to offset employment taxes instead or to even be refundable.  Typically, it is best to begin the process of negotiation early. Call us at TaxOps to discuss potential incentives and best negotiation approach before you make a move. 

3. Understand targeted revenue pockets

When it comes to state finances, cash-strapped states are digging deeper to find new pockets of revenue to bridge ever-widening budget gaps. Along with the usual targets – sales, use, and income taxes – states are reportedly considering tapping into a wider array of potential revenue streams that could include:

• Retirement income
• Unclaimed life insurance policies
• VoIP service taxes
• Gambling and liquor sales
• Estate taxes
• Corporate license plate taxes
• Electric vehicle taxes
• Private aircraft taxes
• Unemployment taxes

4. Be aware of claw-back provisions

Some jurisdictions have been aggressive in including and enforcing claw-back provisions in agreed upon tax incentive packages.  These can result in a loss of some or all of the originally agreed upon benefits if the relocating company does not uphold its end of the agreement in terms of investment or jobs created.

For more information on best U.S. states and counties to conduct business from a tax perspective, please contact Meredith Thiess at 720-227-0064 or mtheiss@taxops.com.

Capital Hill has entered state terrain in an effort to settle the decade-old heated battle between states and online retailers over the collection of sales taxes on online purchases. Depending on your viewpoint, this is either government gone amuck or action that is way overdue.

Legislation known as the Main Street Fairness Act was reintroduced in the U.S. Senate that would require Internet-only retailers to add sales taxes to customers’ bills, just like brick-and-mortar competitors. Each member state under the Streamlined Sales and Use Tax Agreement would be authorized to require all qualifying sellers to collect and remit sales and use taxes with respect to remote sales across the country. It also would require state-approved Streamlined Sales and Use Tax Agreements to meet a lengthy list of simplification requirements to ease administrative burdens for sellers; and exempt small businesses from collecting sales taxes. The bill would compensate retailers for the startup administrative costs associated with collecting sales taxes; and treat all retailers equally regarding sales tax collection.

The bill aims to address a 1992 U.S. Supreme Court decision that requires physical presence in a customer’s state for the collection of sales taxes from mail-order activity. Taxpayers are currently required to report sales that they have not paid tax on; in Colorado a Consumer Use Tax is due on those sales. However, few consumers actually file and pay. The bill would release consumers from existing remittance obligations. It would also help states and localities collect billions in taxes, helping to bridge budget gaps.

Support for a simplified state tax collection system is growing. Among the supporters of simplification are Amazon.com and Sears Roebuck & Co. Simplification is also supported by the National Governors’ Association, the National Conference on State Legislatures, the Governing Board of the Streamlined Sales and Use Tax Agreement, the National Retail Federation, the International Council of Shopping Centers, the Retail Industry Leaders Association, the National Association of Real Estate Investment Trusts, and the National Association of College Stores. Whether that support extends to the Main Street Fairness Act is yet to be seen.

For more information, see links to previous blogs on nexus issues, including:

Michigan Replaces its Controversial Tax Regime
States Take in More Revenue While Cities Take in Less
Nexus Issues Take on More Prominence for Businesses

Or contact Meredith Thiess at 720-227-0064 or mtheiss@taxops.com.

Ohio’s recently enacted budget bill authorizes two temporary tax amnesty programs. The general tax amnesty program will commence May 1, 2012, and conclude on June 15, 2012, and applies to a variety of taxes that were due and payable as of May 1, 2011. Also, a consumer use tax amnesty program is authorized from October 1, 2011, through May 1, 2013. Applications are available from the State of Ohio at http://tax.ohio.gov.

According to the Council on State Taxation, 14 states have amnesty programs in place, including Arizona, California, and Colorado. For a calendar of state amnesty programs through July 14, 2011, go to http://www.cost.org/StateTaxLibrary.aspx?id=17768.

For more details on the Colorado amnesty program, see our June 14, 2011, blog “Zero-cost to eliminate your tax exposure.”

The legislative intent to entice angel investors in Colorado to capitalize new technology startups is written into law, even though the program is not yet funded. The State of Colorado reauthorized the Colorado Innovation Investment Tax credit (CIITC) on June 20, 2011, thereby extending a 2010 tax credit to credit to “angel” investors in startup companies focused on research and development of new technologies for the year 2011. An angel investor is typically a wealthy individual or groups of investors that provide capital to early-stage companies. Successful, newly funded, companies can become growth engines for the state, and help attract additional investors and entrepreneurs.

The CIITC was first introduced by the Colorado legislature to encourage angel investing in new, small Colorado businesses primarily involved in research and development, or manufacturing of new technologies, products, or processes. Under the program, those who invest at least $25,000 in a company five years or younger may be eligible to receive a 15 percent tax credit, not to exceed $20,000. In 2010, CIITC tax credits totaling $622,000 were issued to investors who helped companies generate 28 jobs and leverage those investments to bring in roughly 10 times as much private investment.

According to the Colorado Office of Economic Development and International Trade (OEDIT) that oversees the tax credit program, investors that qualify for the tax credit can be any business entity other than a C corporation. Small businesses that qualify to receive the investment include corporations, limited liability companies, partnerships, or other businesses that maintain a principal place of business in Colorado (OEDIT program eligibility criteria found at http://www.colorado.gov/cs/Satellite/OEDIT/OEDIT/1251568656373).

For more information on angel investment tax credits, please contact Mike Abramovitz at 720-227-0423 or mabramovitz@taxops.com.

To find out when the angel investor tax credit funds become available,
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The Michigan Business Tax (MBT) will be no more on January 1, 2012. The controversial tax and surcharge on gross receipts and income was repealed in May in favor of a Corporate Income Tax (CIT) effective January 1, 2012. The CIT is set at a flat six percent rate and will be levied on C Corporations. Pass-through entities are to be taxed according to the ultimate owner and subject to new withholding rules.

In addition, losses generated under the MBT will not be allowed to offset CIT tax, and most business tax credits are being repealed. The tax on insurance companies and financial institutions will remain largely the same. For companies on a fiscal year, the CIT will require both an MBT and CIT calculation for the tax year that contains the January 1, 2012 date.

The current nexus standard and mandatory combined reporting requirements will remain in place. The standard is more than one day of physical presence, or “active solicitation” and $350,000 of Michigan sourced gross receipts. In addition, single-sales factor apportionment was retained with a slight modification to disallow the Multistate Tax Compact (MTC) three-factor apportionment formula. Until further notice, the Kmart decision, which requires a federal disregarded entity to be treated as a reportable entity on a Michigan combined, unitary schedule, has not been repealed.

According to an analysis by the nonpartisan House Fiscal Agency, Michigan’s business tax revenue is estimated to drop by approximately $1.2 billion in fiscal 2013, but increase by $1.5 billion for individual income tax revenue. Businesses widely supported the flat rate, and see the change to an objective, more competitive business tax as good for job creation.

Questions on this and other Michigan state tax changes can be directed to Meredith Theiss at 720-227-0064 or mtheiss@taxops.com.

Under recessionary and budgetary pressures, many states are turning to amnesty programs to rake in some quick cash from delinquent taxpayers. Remiss taxpayers that take advantage of these windows of opportunity can save themselves money and ingratiate themselves back into the good graces of the State and local taxing authorities.

Amnesty programs give those who owe back taxes a chance to pay off their tax debt, often without attendant penalties and at a reduced rate of interest. In 2010, at least eight states offered a no-penalty payback period, including Florida, Kentucky, Maine, Massachusetts, Minnesota, New Mexico, Nevada, and Pennsylvania. Already this year, the states of Michigan and Washington have given select taxpayers a free pass to pay up. Arizona and Colorado will soon follow with an amnesty period later this year.

Tax amnesty programs are used by states and local jurisdictions to collect unpaid taxes faster and more cheaply than they otherwise would if states had to hunt non-filers down for payment. By declaring an amnesty period, states encourage taxpayers to report and pay delinquent taxes through voluntary participation in the amnesty programs.

Since 1982, 45 states and the District of Columbia have established 111 tax amnesties, according to the Bell Policy Center. Eighteen states have declared three or more tax amnesties over this period including Arizona, Kansas, Nevada, Oklahoma and Texas. Colorado has relied on amnesty twice to recover delinquent payments. In 1985, the Bell Policy Center reports that a Colorado tax amnesty period brought in $6.4 million and in 2003, a second amnesty period generated $23 million of tax payments in arrears.

Delinquent Colorado taxpayers may want to consider participating in the tax amnesty program set for Oct. 1 through Nov. 15 of this year (Senate Bill 184). Only companies and residents who had overdue taxes as of Dec. 31, 2010 may take advantage of the amnesty, excluding those with whom the State has already begun the legal process of collecting back taxes.

Those states without official amnesty programs might give delinquent taxpayers similar reprieve options under a Voluntary Disclosure Agreement (VDA). For more information on amnesty programs and VDAs, contact Meredith Theiss at mtheiss@taxops.com or 720-227-0064.

Across the U.S., state and city revenue collection is trending in opposite directions. Revenue collections at the state level are growing while city coffers begin what is widely expected to be a long bleed. According to an April 2011 report by the Rockefeller Institute of Government at the State University of New York, states’ tax revenues finished 2010 strong, with 7.8 percent growth in the fourth quarter and solid gains continuing in early 2011. Tax collections by local governments, however, declined by 2.3 percent in the fourth quarter of 2010, driven mostly by declines in property tax collections (www.rockinst.org).

This is good news for states that are facing widespread projected budget deficits.
According to the Wall Street Journal (http://online.wsj.com/article/SB10001424052748703916004576271133030250682.html?mod=dist_smartbrief), states get most of their revenue from income and sales taxes. As the economy plunged in recent years, so too did state collections, which has led to the aggressive positions taken by the states on issues such as nexus, and apportionment and allocation. In recent quarters, state collections have begun to show signs of revival as income-tax receipts increase. Personal income taxes increased 14% in the 45 states tracked by Rockefeller. Corporate income taxes were up 11.5%, and sales tax up 5.2%. While this is great news, we don’t see the states letting up on their collection efforts anytime soon.

Cities, however, are just now feeling the recessionary kick as property values are reassessed to reflect the drop in housing prices. This could mean a prolonged weakening in tax collections at the local level. Property values are unlikely to trend back up to pre-recession levels any time soon, meaning local governments may be looking at a long period of spending restraint.

State filings have traditionally not been a top priority for businesses. Rather, their attention has been concentrated on getting provisions correct and federal returns done and filed in a timely manner. State tax issues have largely been an afterthought.

Now, faced with huge budget deficits, that “catch me if you can” approach is proving to be fraught with risk. States are aggressively trying to find new ways to raise revenue. According to the Center on Budget and Policy Priorities, 44 states are projecting budget shortfalls in 2011, 2012, and 2013 (www.cbpp.org/cms/?fa=view&id=711). As a result, businesses of all sizes are receiving notices that they will be under audit as states conduct a witch-hunt to find extra income and sales tax revenue from companies doing business within their borders.

With regard to sales tax specifically, though, determining a company’s tax obligation in each jurisdiction can be tricky. Companies that determine they have nexus in a particular jurisdiction must further determine whether their sales are taxable or not. The rules for determining taxable sales swing wildly from state to state, and between local jurisdictions within the same state. The presumption is that all sales are subject to sales tax unless exempt. For example, Colorado has a manufacturing exemption, so qualifying equipment purchased for manufacturing purposes would not be subject to sales tax.

States approach nexus issues differently. Some states, such as New York and California, are typically more aggressive than others in going after businesses. In 2009, the New York Supreme Court upheld a ruling that required Amazon to collect sales tax on those purchases that were made through a link posted on New York based companies’ websites (Amazon.com v. N.Y. Dept. of Finance & Taxation (N.Y. Sup. Ct. Jan. 12, 2009). Each time Amazon and other online retailers pose as the storefront for a business located in the State of New York, sales are taxed by the State. This is commonly referred to as “click-through” nexus; similar rulings have been made in other states. Elsewhere, states may not be collecting from buyers when the sellers do not have a physical presence or nexus in the state where the buyer makes the purchase.

Generally, determining whether a multi-jurisdictional company has an obligation to collect and remit sales tax requires a nexus study, which in itself can be cost-prohibitive for many organizations. In the absence of a nexus study or research on whether the sale is actually taxable, some companies may opt to collect and remit taxes across the board to eliminate all exposure. However, in doing so, companies should weigh the cost of collecting and remitting sales tax against the cost of any competitive disadvantage that sales tax collection may create. Companies in states like Colorado, where the sales tax rate exceeds 7%, could be at a large disadvantage if they decide to collect taxes where in fact they are not required to do so.

The risk in ignoring potential requirements around nexus can be significant. The exposure may not materialize for years until the company receives notification from a jurisdiction that the company should have acted as an agent. Should this happen, the company could transition from agent to taxpayer because of the missed opportunity to collect sales tax from customers at the point of sale. In addition, the company is responsible for any penalties and interest that the jurisdiction imposes.

While the state statutes require filing in jurisdictions where you are doing business regardless of materiality, many companies are taking a practical approach to dealing with the uncertainty around nexus issues by weighing state exposures and alternatives. For example, some companies are segregating jurisdictions by revenue to focus on areas of high-revenue concentration. In jurisdictions where revenues are substantial, these companies determine whether to collect and remit sales tax or live with the exposure based on information they have on hand. These are “risk management decisions” undertaken by educated taxpayers in managing complex business situations. If taxpayers discover, after the fact, that they should have collected taxes, they could potentially participate in a state’s voluntary disclosure program. Voluntary disclosure programs are an anonymous way for taxpayers to file back tax returns, typically filing returns for the current and three to four preceding years, and getting a percentage of interest and penalties waived.

Companies will have to make the decision on how to proceed with the most current information in hand. During 2010, many states were busy adding, deleting and modifying statutes to provide for nexus designations and other nuances that would allow these states to collect sales tax revenue on out-of-state business transactions. It is important to note that nexus rules are different for sales tax and income tax, while one activity would create sales tax nexus, the same activity might not create income tax nexus. For a listing of the most up-to-date nexus designations and other top tax issues by state, see the AICPA’s Tax Advisor Current Corporate Income Tax Developments, Parts 1 and 2.

Current Corporate Income Tax Developments, Part I
http://www.aicpa.org/Publications/TaxAdviser/2011/March/Pages/Boucher_March2011.aspx
Current Corporate Income Tax Developments, Part II
http://www.aicpa.org/Publications/TaxAdviser/2011/April/Pages/Boucher_apr2011.aspx

The nation finally may be on the road to recovery, but state budgets are lagging far behind. Precipitous revenue drops, double-digit unemployment, and rising demand for social services has put most states deep in the red. According the National Conference of State Legislatures, 33 states project budget gaps for fiscal year 2012, and 23 states for fiscal year 2013. As a result, cash hungry states are demanding their “due” from out-of-state retailers. The Supreme Court may, however, have the final say in whether requiring online vendors to collect sales tax is actually constitutional.

The practice of taxing out-of-state business transactions is already feeding coffers in the states of New York, North Carolina, Colorado, and Rhode Island. But retaliation from at least one major e-retailer has been swift; Amazon has cut its ties with North Carolina, Rhode Island, and Hawaii affiliates over the issue of out-of-state taxes. More states are likely to be cut as the battle lines are drawn taut.

For state legislators facing deep deficits, online retailers look good as a partial fix to a huge problem. The combined revenues of the nation’s largest online retailers – Amazon, Staples, Dell, Office Depot, and Apple – is significant, and the potential for collecting sales tax from these and other e-retailers is enormous. A 2009 University of Tennessee study estimated that uncollected sales taxes on e-commerce cost states $7.7 billion in 2008. This revenue loss will only grow as internet sales continue to displace in-store sales.

Brick-and-mortar store owners bemoan the tax exemption as well. Exempting online retailers from having to collect sales tax, as regular stores must, gives these companies an estimated 4 to 9 percent price advantage over local stores.

Events during the year 2011 may determine the taxable retail landscape going forward. Should the Supreme Court take on the issue, the Court will decide whether states have the undisputed authority to require businesses to collect and remit state sales and use taxes on remote sales. Such a decision would level the playing field between brick-and-mortar and online retailers. A decision in favor of e-retailers win, however, could spell the demise of even more small town shops unable to compete with virtual big-box sellers.

For a primer on prior court cases, see Robert Willens CFO.com posting from Jan. 31, 2011, available at http://www.cfo.com/article.cfm/14553089/CL_2984354.

Minnesota Republicans have come out pro-business in a big way. Will other states follow?

On the first day on the job this session, state Senate Republicans in Minnesota proposed slashing corporate taxes in half over a six year period. And as an added bonus, they threw in a business owner’s property tax break as well. Republicans expect budget cuts in other areas and a growing economy to offset the loss in revenue from the proposed tax cuts. Nevertheless, the cuts will put additional strain on an already $6.2 billion state deficit in the short run if the measure passes.

“We’ve seen governments at multiple levels focus on government jobs, on government stimulus. We want to stimulate the private sector. We want to stimulate private sector job creators,” said Deputy Majority Leader Geoff Michel, R-Edina, saying that Minnesota corporate taxes were too high. Minnesota businesses pay a 9.8 percent corporate income tax rate prior to deductions and tax credits. The state overall collects 4.5 percent of its revenue from corporate income taxes, well below the 5.6 percent national average.

“We all share the same priority, making Minnesota work again and putting Minnesotans back to work. I welcome all ideas on how best to achieve these goals. The legislative process provides the opportunity for all ideas to be discussed,” Governor Mark Dayton said.

Michel said tax breaks could help corporations feel more comfortable opening the purse strings to staff up. Opponents say cutting taxes is a poor way to increase employment.

In either case, the Republicans efforts to lower corporate taxes is just the first in what is sure to be a volley of proposals this session aimed at tweaking the tax code to get the Minnesota economy purring again. By the way, even if Minnesota State Republicans succeed in halving the current corporate tax rate, it would still be a few points higher than Colorado’s corporate tax rate of 4.63%.