A Step Closer to Sales Tax Collection for Online Purchases

The Indiana Chamber supports SB 545 (Sales Tax Collection by Remote Sellers).

This bill takes an important step toward the Legislature requiring online retailers who have no physical presence in Indiana to collect Indiana sales tax from their Indiana customers when they make online purchases. Ultimately, one of two things must happen for the requirement to go into full effect. Either the U.S. Supreme Court has to determine that states are allowed to impose this requirement based on their economic activity in the state (and the nominal burden associated with it), or Congress must pass legislation to authorize states to require the online sellers to collect a state’s sales tax.

The issue is pending before both bodies and several states are passing legislation to put pressure on one of the two entities to act and resolve the issue. Senate Bill 545 is modeled after a South Dakota law that is under review by the high court. It is designed to put Indiana in the position of making the requirement effective as soon as an Indiana court declares the collection valid under federal law. So this remains legally complicated, but SB 545 is a thoughtful and sound approach.

Senator Luke Kenley has pursued this issue diligently for many years – doing everything possible to address the problem of the sales and use tax on these transactions going uncollected. He is to be commended for his pursuit in the past and for formulating this legislation. In-state brick and mortar retailers are put in an unfair position when their online competitors are not required to collect and remit Indiana’s sales tax (as they are), effectively giving the “remote sellers” a 7% price advantage. Additionally, Indiana’s sales tax base is diminished each year as the online sales market continues to grow at rapid rates. What’s more, this is not a new tax since purchasers are already legally obligated to report their online purchases and pay the “use” tax when they file their income tax returns. But the reality is very few people comply with this law.

The Chamber supported the bill in committee this week and, in fact, has been working along with Sen. Kenley for years to achieve, by some means, state authorization for collecting these unpaid taxes. The objective is set forth in our Indiana Vision 2025 economic plan and we just might, after years of complications, be getting closer to obtaining this goal.

Taxes and Public Finance: A Very Early Look at What We Are Following

We have yet to see the complete list of bills that have been introduced, and no bills having primarily to do with tax have yet been heard in committee. But of those that are available for viewing and assigned to committee, quite a few are worthy of note. They may or may not ultimately get a hearing, so it cannot be said that they are moving. Nevertheless, these bills are ones to keep an eye on.

Two measures will undoubtedly move through to the end of session – albeit with the expected/unexpected twists and turns. House Bill 1001 on the budget currently contains the Holcomb administration’s spending proposals – that is until the Ways and Means Committee has its way with it. Accompanying it will be HB 1002, the measure for long-term transportation funding (see Mark Lawrance’s infrastructure story).

There are the usual sales tax exemption and sales tax holiday bills, which historically have not been favored by the budget makers: HB 1063, HB 1111 and SB 53. There are many dealing with property tax assessment and property tax appeals, which could get some attention: HB 1046, HB 1056, HB 1105, HB 1198, HB 1229, HB 1299, SB 292, SB 331, SB 350 and SB 415. Meanwhile, SB 449 addresses how personal property tax audits can be funded; SB 308 would take heavy equipment that is rented off the property tax rolls and puts an excise tax on the rentals; HB 1247 creates a minimum property tax fee; and SB 342 revisits tax increment financing.

On the local tax front, HB 1129 keeps up the ongoing work on local option income (LOIT) taxes while HB 1096 grants broad authority to locals to adopt food and beverage taxes.

Interestingly, and unnecessarily, HB 1160 seeks a further study of the Tax Court (on top of the review conducted by the Supreme Court just last year.) Tax attorneys will be interested in SB 440 as it gets into some procedural issues.

This is just a small sampling of what has been filed. Once bills involving tax matters begin to make their way through the committees, we will report on those that are of consequence to the business community.

Smaller State Revenue Collections Continue: How Will It Impact 2017 Legislative Session?

Each December the state budget makers receive a revenue forecast prepared by group of very knowledgeable and conscientious fiscal analysts, economists and academics. The group considers economic predictions, uses elaborate models and applies involved equations to generate what has proven to be remarkably accurate predictions of how much the state will collect in taxes over the next two years. Every other year, including this year, their numbers serve as the basis for building the state’s biennium budget. While lawmakers will debate how the projected revenues should be spent, Indiana is fortunate that lawmakers accept the consensus of these experts and do not debate how much money there is to spend – as is the case in many other states.

Forecasters project that Indiana will take in $31.5 billion in FY2018 and FY2019. This is around a billion dollars more than what was projected for the last biennium. However, as good as the predictions have been historically, FY2017 estimates turned out to be off the mark by $378 million. Low gas prices were a major contributor to the inaccuracy. Unexpectedly cheap gas meant less sales tax on those less expensive fill-ups.

When coupled with generally weaker sales tax collections, the FY2017 (ending in July) collections are now expected to be about 2.5% less than earlier projections. That money will have to be made up in the first year of the biennium, from the projected 2.9% year-over-year (FY2018 over FY2017) growth. Fortunately, the forecasters see a little better growth, 3.9%, in the second year of the biennium (FY2019). The bottom line is that the money available to cover growing expenses and new funding desires will be very modest, somewhere around $1 billion – that’s only about 3% more money for the entire two-year period. And essentially it all comes in the second year, so look for budget makers in the 2017 legislative session to be very frugal in FY2018 and then build in some increases in FY2019.

Economic uncertainty, sluggish sales tax collections, further diminishing gaming revenues and other factors will all put additional pressure on the budget process. As these things play out, the forecasters could shift their numbers a little more before they update their two-year projections in mid-April, just a couple of weeks before the budget has to be passed by the General Assembly.

Chamber to Study Committee: ‘Why Jeopardize Our Tax-Friendly Image?’

The much anticipated study of combined reporting, performed over the summer by the Legislative Services Agency (LSA) Office of Fiscal Management Analysis, was recently outlined to the legislative Interim Committee on Fiscal Policy.

As a refresher: Combined reporting would impact companies here with operations outside of the state. It tasks these businesses with adding together all profits for one report. Indiana’s current system of separate accounting allows for each subsidiary to report independently based on its location.

The study was required by SEA 323, which passed last session. That legislation also directed a study of the related issue of transfer pricing. Both LSA studies were presented to the interim committee and have now been made available to the public.

The combined reporting study, however, was by far the more comprehensive and was the primary subject of discussion at the interim committee meeting. The report includes examples that demonstrate how a switch to mandatory unitary combined reporting would have varying impacts on taxpayers.

Depending on their particular circumstances, some taxpayers would see their tax liability increase while others would see it decrease. The end result being that the overall effect on the tax revenue stream is unpredictable.

Using data from numerous states and applying econometric techniques, the LSA economists estimated that Indiana could see an initial spike in corporate tax revenue but that it would “only be short term and will decline to zero in the long run.” The study also recognized that while the change could be beneficial in addressing some current issues, such as transfer pricing disputes, it would raise a multitude of new administrative burdens and complexities; most notably those associated with the core difficulty, “determination of the unitary group” – exactly which affiliated entities are ultimately to be deemed part of those that must be combined. In other words, going to combined reporting only trades one set of problems for a different challenge of substantial magnitude.

Studying combined reporting is itself a complicated and difficult task. The LSA did a nice job of putting the issues in historical and practical context, identifying the issues and analyzing the potential impacts. What it could not do, because it isn’t really its role, is fully evaluate how a change could disrupt the progress that has been made over the past 15 years in improving our state’s business climate. Governor Robert Orr concluded in 1984 that combined reporting would be “extremely detrimental to Indiana’s economic growth.” In his open letter to all corporate taxpayers, he offered his assurance that Indiana “does not, and will not, require combined reporting.” That position proved significant in attracting the large manufacturing facilities built by multi-national companies that presently employ thousands of Hoosiers across the state.

Why would you want to reverse this course, abandon the certainty that comes with 50 years of tax law and jeopardize our image as the most business-friendly state in the Midwest and among the top in the nation? This was the core of the Indiana Chamber’s testimony to the interim committee. As for those who view a possible change to combined reporting as a means for dealing with what they label a “compliance issue”, the Chamber committed to work with them. We will need to find less drastic ways to address their concerns and identify ways to respond to the situations they believe represent noncompliance.

It should be noted that concerns with transfer pricing issues seem to have served as the impetus for much of the larger discussion of combined reporting. Consequently, focusing on those issues would provide the potential for reaching resolutions, without a major structural conversion to mandatory unitary combined reporting. In fact, Appendix A to the Transfer Pricing study points to several possibilities that deserve further exploration.

View the combined reporting study and transfer pricing study.

Trump Tax Plan 2.0

19145168Republican presidential candidate Donald Trump recently announced revisions to his tax plan. And it has already been broken down and analyzed by the Tax Foundation. Individuals would be subject to just three possible rates: 12% for up to $37,500 in income; 15% for up to $112,500; and, 33% for over $112,500 (all double for married couples.) The top capital gains rate would be 20%. It would also increase the standard deduction to $15,000 (currently at $6,300.) Carried interest would be taxed as ordinary income. And there are other changes including a new childcare cost deduction.

As for business taxes, the plan reduces the corporate rate from 35% to 15%. It has a lesser rate of 10% for repatriated foreign profits. But on the negative side for manufacturers, it takes away the Section 199 domestic production activities deduction. The research credit is left intact. Unfortunately, it is not clear that the reduced corporate 15% rate will be applicable to business pass-through income (stay tuned on that.)

The estate and gift tax would be eliminated. However, the inheritors would eventually have to pay on the full gain realized when they sell the asset, without the benefit of a stepped-up basis.

What about the impact on revenues and our federal debt? Well, the new plan is better in that regard than the original. The static evaluation is that it will reduce revenues (increase the debt) somewhere between $4.4 trillion and $5.9 trillion (depending on the unspecified details) over 10 years; that is roughly half of the estimate of the plan he first outlined. The dynamic analysis, factoring in economic growth improvement associated with tax cuts, lessen the overall impact, but those numbers are inherently more speculative.

See the complete analysis and full breakdown from the Tax Foundation.

Tax Court Under Scrutiny

10044552In April 2015, the Indiana Supreme Court ordered the creation of the Ad Hoc Tax Court Advisory Task Force to review the Indiana Tax Court’s resources, caseload, performance and operations. In May of 2015, the General Assembly passed legislation calling for the Indiana Judicial Center to conduct a like review and submit a report to the Legislative Council by December 1, 2016. The Supreme Court subsequently amended its order to have the task force submit its report to the Judicial Center and the Legislative Council by May 1, 2016.

In April 2016, the task force issued its findings and recommendations along with a report compiled by the National Center for State Courts (NCSC), which was contracted to assist the task force. These materials are now getting some attention and are definitely worthy of examination. The nine-member task force was chaired by Court of Appeals Judge James S. Kirsch. The members include a variety of experienced tax practitioners as well as the general counsel for the Department of Revenue and chief deputy for the Office of Attorney General. Tax Court Judge Martha B. Wentworth also participated as an “ex officio” liaison and attended meetings by invitation from the chair.

The NCSC researched the Court’s caseload, staffing and timeliness. It also interviewed stakeholders and conducted a survey seeking opinions on these subjects and on the perceived timeliness, fairness and demeanor of the Court. And it looked into case management, internal procedures and administrative practices. The statistical results, observations and recommendations are all set out in the report. The survey results evidence a contrast in opinions between the government responses and taxpayer responses regarding the quality of service provided by the Tax Court.

In short, it seems that the government representatives are significantly less satisfied with the Court. Not unrelated to their disgruntlement, it was noted in the preface to the findings that the Department of Revenue and attorney general members of the task force sought recommendations to review the very structure of the Court, recommending review of the de novo hearing process and the lack of automatic appeal rights. However, the majority of the group and the chair found these matters “outside the purview of the task force’s directive.”

Several things were apparently deliberated and no specific findings or recommendations were made. Ultimately, the task force’s primary finding was that after 30 years, the existence of the Tax Court still serves its initial purposes of providing tax expertise, tax law consistency and renders fair and thoughtful opinions.

The findings do focus on the need for continued progress in timely addressing pending cases and the utilization of resources and staff. The report recommends an ongoing review and suggests the Tax Court explore several reforms to its case management practices, including ruling on some matters without oral arguments, limiting discovery, requiring the Department of Revenue to certify a complete audit file (to avoid it having to be reconstructed) and referring some cases to mediation.

The findings and recommendations, NCSC report and other materials are available online.

Clinton vs. Trump? A Taxing Decision in November

Now that the election process is to the point where the presidential nominees of the two major parties appear clear, it’s a good time to start considering their various tax plans. Although things can change, details will have to be determined and Congress will have its say, below are some of the current proposals from the two presumptive candidates.

Individual Income Tax
Donald Trump proposes just four brackets; Hillary Clinton proposes eight brackets.

trump clinton tax

Deductions
Clinton caps itemized deductions at 28% of the deduction. Trump phases out all deductions except for the charitable deduction and the mortgage interest deduction.

The Alternative Minimum Tax (AMT)
Clinton creates a new minimum 30% rate on individuals earning over $1 million, while Trump eliminates the AMT.

Corporate Income Tax
Trump lowers the top corporate rate to 15%; Clinton has no specific proposal at this time.

Estate Tax
Clinton increases the top estate tax rate to 45% and lowers the estate tax exclusion to $3.5 million. Trump eliminates the estate tax.

Effect of Plans on the Deficit
And as a final note, you may also want to consider how these proposals will likely impact our federal deficit. Trump’s plan is projected to increase the deficit by $9.5 trillion over the next 10 years; Clinton’s is estimated to reduce the deficit by $1.2 trillion over that same period of time.

Online Sales Tax Collection Inching Closer?

19145168It’s been nearly 25 years since the U.S. Supreme Court ruled in the Quill case regarding online sales – that states could not require a company that has no physical presence in their state to collect the state’s sales tax when they sell their goods to a resident of that state through the mail or via the Internet.

The Court held that requiring the collection of sales tax, without congressional authorization, constitutes interference with interstate commerce in violation of the U.S. Constitution. So Congress needs to pass legislation allowing the states to require online sellers to collect the tax. But that has still not happened.

The Marketplace Fairness Act (MFA) legislation would provide the needed authority, but hasn’t gotten enough support.

The opposition primarily comes from two groups: (1) some of the Internet-based companies which would have to collect the tax; and (2) people who view the legislation as a new tax.

Internet companies object to the administrative burden of collecting and remitting the tax, and they obviously want to maintain their current price advantage over the local brick-and-mortar retailers and other Internet companies that have a physical presence in many states, who must already collect and remit sales tax.

Those who consider it a new tax are, at least technically-speaking, simply wrong. When an in-state resident buys something online and doesn’t pay because the company isn’t obligated to collect the tax, those residents are legally responsible to pay the equivalent of the sales tax.

In these cases it is called a “use” tax (because they use the purchased product in their state) and everybody is supposed to report it on their state tax return. Unfortunately, the vast majority of taxpayers ignore this obligation. The simplest answer is to have the Internet seller collect the tax just as the local retail store does.

Online purchases now make up close to 10% of all retail sales and that percentage is steadily climbing.

This is a growing problem across the country, but especially for states like Indiana that are heavily dependent on sales tax – which accounts for 46% of Indiana’s total tax revenues. States are losing an estimated $11 billion in uncollected sales tax each year. Indiana’s losses are put at $200 million annually, and these numbers are growing by nearly 10% each year.

No question these numbers are driving up pressure for Congress to take action. The MFA passed the Senate in 2013, but it got bogged down in the House Judiciary Committee.

Many who are dedicated to the cause have worked to iron out a number of administrative wrinkles and to keep momentum going on this effort. The best speculation is that it will have to be made part of some larger legislative package in order to garner some compromises and the necessary level of support.

Of course, it is impossible to predict, but tax reforms and such tax packages could be on the table after this election year.

Usual End of Session Tax Legislation Hodgepodge

19145168A few big bills filled with various tax provisions remain. Ones dealing primarily with property tax are SB 308 and HB 1290, and another affecting sales and income taxes is SB 309. Meanwhile, a couple bills – SB 323 and HB 1215 – call for important issues to be studied during the interim. And another bill cleans up last year’s “de minimus” legislation in HB 1169. All par for the course going into the final leg of the session.

Senate Bill 308, authored by Sen. Brandt Hershman (R-Buck Creek), and HB 1290 authored by Rep. Tim Brown (R-Crawfordsville), are intended to take another shot at the “big box” property assessment issue and will require the Senate Tax and Fiscal Policy Committee chair (Hershman) and the House Ways and Means Committee chair (Brown) to work out some differences in conference committee. There is much agreement on a new approach to incorporate the concept of market segmentation into the process, but disagreement on the need to include a provision concerning actual building construction costs (that was part of the legislation from last year that is being repealed and replaced with the market segmentation provisions).

The two chairmen will also have to sit down and sort through differences in SB 309 that gets into all kinds of other tax matters. This bill is the one that effectively overturns the Tax Court case regarding the taxation of materials used in construction projects (the Lowe’s case.) Senate Bill 323, also a Sen. Hershman bill, directs the Legislative Services Agency to study mandatory unitary combined reporting for apportioning Indiana’s corporate income tax. This is an issue of great significance and concern to the Chamber. The House amended this bill to add transfer pricing, a related issue, to the scope of the study. Transfer pricing was at the heart of the Tax Court cases that spurred Sen. Hershman to promote the idea of combined reporting.

Another bill, HB 1215, authored by Rep. Brown, asks for the study of the personal property audit process. The Chamber welcomes this initiative to take a closer look at how these audits are conducted by private consultants working for the county assessing officials.

And lastly, we are pleased to report the passage of HB 1169, introduced by Rep. Tom Saunders (R-Lewisville) to remove the notarization requirement attached to last year’s “de minimus” personal property tax exemption. Last week, the Senate took out the House’s reduction of the maximum county option fee; Rep. Saunders and the House concurred to that change and the legislation now moves to the Governor for signature.

Speculations on Tax Matters for the 2016 Session

What’s in store for 2016 relating to tax issues? Nothing is too clear just yet, but there are a couple significant areas of speculation:

Revisiting “Big Box” Commercial Assessment: This issue was addressed last session in SB 436. But most expect it to be brought back up again in some fashion in 2016. The Indiana Board of Tax Review (IBTR) has raised several legitimate questions about exactly how the changes in SB 436 should be interpreted. Ambiguities will make application of the new laws difficult for the IBTR. This has led some to conclude that a different approach may be better than what was passed last year.

The focus has remained on what is properly considered a “comparable sale” for appraisal/assessment purposes when evaluating a special-built commercial structure. The discussion has turned to an appraisal concept referred to as “market segmentation”, essentially a method for narrowing the field of sales that should be considered reflective of the value of these more limited purpose buildings. Other ideas revolve more around how the IBTR goes about its adjudicatory work and whether some additional procedural adjustment and guidance from the Legislature would be beneficial.

Push for Combined Reporting: Sen. Brandt Hershman (R-Buck Creek), chairman of the Tax and Fiscal Policy Committee, is apparently entertaining the idea of changing the requirements relating to how a corporation must report its income. Under current law, a corporation files its return based on the separate, independent status of each corporate entity, without regard to its affiliation or business relationship with other entities. Nevertheless, the Department of Revenue (DOR) is authorized to require a corporation to combine its income with that of an affiliated/related company in a “combined reporting” if there is such a connection between the companies that the DOR views them as having a unitary business purpose and believes they should be treated as one for taxation.

A good number of states make such combined reporting mandatory in all cases, and the speculation is that Sen. Hershman is thinking about putting Indiana in that category. But this would be a very controversial move and is fraught with a myriad of economic, political and practical issues. Not the kind of matter typically taken on in a non-budget year; perhaps he wants to float it this year to spur discussion. The Indiana Chamber has a long-standing position against combined reporting.