State Tax Outlook for 2015
posted Feb 10, 2015 by Harold Shapiro, CPA in the Global Tax Blog
At a recent talk I attended, Harley Duncan, a national expert on state and local taxes, shared some facts concerning the outlook and trends for state taxes around the country. Duncan revealed four generally favorable trends that are either present or developing in states across the country. Most states seem to be leaning towards a fairer approach to tax that will ultimately lead to increased revenue.
Four Emerging Trends
- Lower state corporation and individual income taxes- In an effort to attract more business and help create jobs, the trend over the past few years has been to lower state corporate and individual income tax rates. Massachusetts dropped their corporate income tax rate from 9.5% to 8% several years ago. For tax years beginning on or after January 1, 2015, Rhode Island’s corporate rate has been reduced from 9% to 7%. New York has lowered its rate to 6.5% for qualified manufacturers and, in addition to this, has added many investment and job creation incentives for qualified businesses. Duncan believes there will be continued incentives like this in many states.
- Single sales factor apportionment- One trend that has been occurring over the past few years is the movement toward a single sales factor apportionment for companies doing business in multiple states. Rhode Island has enacted this for C corporations and Massachusetts enacted it for manufacturing corporations a number of years ago. Single factor sales apportionment is generally favorable to companies whose main business is located within the state. The problem with this method is that companies may be paying state corporate income taxes on more than 100% of their income depending upon which states they are filing tax returns in. For this reason, this method has resulted in some litigation and efforts by companies to use alternative apportionment methods. Currently, most states use a three factor apportionment which includes sales, payroll and property, which gives a fairer result.
- Combined or unitary reporting of income- Many states have adopted a policy regarding combined or unitary reporting of income by related entities. Generally this requires corporations and possible other related entities, often defined as greater than 50% common ownership and part of a unitary business, to file a combined state tax return. Massachusetts adopted this filing method several years ago. Rhode Island has joined this effort and adopted the rule for filings by C corporations effective for tax years beginning on or after January 1, 2015. States believe this method is a fairer approach and will also generate more state revenue.
- Economic Nexus- To determine whether a business is taxable in a state, many states have adopted the “economic nexus” approach. Nexus refers to a sufficient physical presence in a state. Public Law 86-272 prevents states from imposing an income tax on a company if the company’s only activity within a state is the solicitation of sale of tangible personal property. The economic nexus standards differ from state to state, but impose a state income or other business tax on companies that have attained a certain amount of sales, property or payroll within a state. Service based companies will generally be subject to state income tax in any state they are providing services.
2015 is already looking like a busy tax year! For questions regarding any of these tax trends, contact us.