Multistate Tax Update - January 8, 2015
Ohio: Legislature votes to amend residency requirement
With the passage of HB 494, the Ohio legislature recently amended the statute dealing with the presumption of domicile purposes of state income taxes. The amendment increases the amount of time, from 182 to 212 days, that a person may spend in Ohio before being presumed to be a resident for income tax purposes.
This change has implications in a variety of contexts, one of which we addressed last August in part I of our series on the complexities of a professional athlete’s tax calculations. It concludes the state in which the taxpayer athlete is domiciled is the state in which he or she will file a resident tax return, and pay tax on all income earned. But if an athlete is drafted, traded, or signed via free agency during the year, domicile can change, even if he or she maintained an Ohio home at some point during the year. Thus, the amendment may offer significant tax savings to an athlete who no longer is present in the state for the requisite number of days under the statute.
States consider higher gas taxes as infrastructure crumbles
According to a 2011 report by the non-profit Institute on Taxation and Economic Policy (Institute), a state’s gas tax is one of the least sustainable, but most important sources, of transportation funding within the control of state lawmakers. The report characterizes the gas tax as one that is built to fail in 36 states because, as a fixed rate tax, it returns the same amount on every gallon of fuel purchased, year in and year out. As prices of labor and materials like asphalt and concrete increase, states are not collecting enough in gas taxes to keep up. The Institute predicts that if states updated their gas tax rates to maintain purchasing power, gas tax revenues would be $10 billion higher per year than present collections.
Inaction is the problem
The non-profit blames the shortsightedness of state lawmakers for failing to plan for the inevitable rise in transportation construction costs; most states have not increased its gas tax rate in a decade. The report points to estimated $300 million losses in Iowa and Oklahoma, and $500 million losses in Maryland and New Jersey.
Massachusetts is another example of a state that is falling behind. As we wrote in November, voters in the midterms repealed annual gas tax adjustments, so the gas tax rate will remain at 24 cents until lawmakers change it. According to a Tax Policy Center brief, Reforming State Gas Taxes, if voters had kept the adjustments in place, Massachusetts would likely have collected an additional $360 million in revenue.
The Tax Policy Center argues that federal inaction also contributes to the states’ predicament. The highway trust fund faces insolvency concerns because the last time Congress increased the federal excise tax rate on gasoline to the current 18.4 cents per gallon was in 1993. Other factors contributing to the insolvency concerns relate to decreases in the number of miles motorists drive and more fuel efficient vehicles. The excise tax rate remained constant even though gas prices have increased by 136 percent between 2000 and 2013.
Both the Institute and the Tax Policy Center agree that gas tax increases in the short-term and overhauls of gas tax policy in the long-term offer a solution. By the Institute’s calculations, a 10 cent per gallon increase would generate $4.31 per month in additional revenue from the average driver. As for long-term reformation, the Institute suggests linking the gas tax rate to transportation cost growth, inflation, or the price of gas.
Some states are either following this path or have come up with other ways to solve their infrastructure problems. On the other hand, other state officials refuse to consider a gas tax, leaving their states to struggle until they figure out an alternative.
A recent Detroit News article described a flurry of legislative activity at the end of December, which lawmakers anticipate will raise $1.2 billion for road funding. The approved legislation includes the following:
- House Joint Resolution UU: A proposed constitutional amendment asking voters to increase the six percent sales tax to seven percent during the May 2015 general election.
- HB 5477: Replaces the current 19 cent per gallon gas tax and 15 cent diesel tax with a 14.9% wholesale fuel tax. This will be offset by exempting fuel sales from the state sales tax. As set forth in HB 4539, eliminating the sales tax on motor fuels will phase in over a six-year period. Both HB 5477 and 4539 are tied to the constitutional amendment vote, so neither will be enacted unless voters approve the sales tax increase.
- HB 4630: A measure to increase vehicle registration taxes on trucks and cars more than three years old, and electric vehicles. Vehicle owners would pay approximately $95 million more each year if the bill goes into effect. HB 4630 is also tied to the constitutional amendment vote in May 2015.
Businessweek.com reveals that Iowa Rep. Josh Byrnes, the Republican chairman of the House Transportation Committee, is “optimistic that Iowans are ready to support a funding proposal dedicated to transportation.” In the last two years, Iowa has seen a shortfall of $215 million in annual transportation funding, but voters have declined to raise the gas tax, which has not changed since 1989.
In part, Rep. Byrnes’ optimism stems from the fact that he was elected with 63 percent of the vote despite his enthusiasm for raising revenue.
A Quinnipiac Poll finds that New Jersey voters oppose increasing the gas tax to finance road and mass transit improvements, by a margin of 58 percent to 39 percent. However, voters support the construction of a new rail tunnel between New Jersey and Manhattan, by a similar margin 53 percent to 37 percent.
Businessweek.com reported Republican Gov. Chris Christie, who has opposed raising the gasoline tax, as being “open to all options.” The governor even went so far as to put a Democrat in charge of transportation spending. Nevertheless, the poll suggests that New Jersey is not likely to see a gas tax increase any time soon. The issue of “how to bail out the broke transportation trust fund crosses the double white line for a head-on collision with a cardinal rule of New Jersey politics: Don't hike the gas tax."
The Plain Dealer reports that Gov. Kasich is not inclined to use gas taxes to fix Ohio’s infrastructure. Instead, the paper points out that his strategy involves a $1 billion bond issue by the Ohio Turnpike combined with a toll increase. Citing the fact that the state “is coming off the biggest construction season in [the Ohio Department of Transportation’s] history,” the administration is confident that it need not punish taxpayers by way of an increase in the current gas tax of 28 cents per gallon. According to the Tax Policy Center brief, this figure has grown seven percent since 1993.
While all states impose a gas tax, the Tax Policy Center brief reflects considerable variations in both rates and rate increases over time:
States with the highest gas tax
States with the lowest gas tax
|California: 46.5 cents per gallon, a 30.5% increase since 1993||Alaska: 8 cents per gallon, a 0% increase since 1993|
|Pennsylvania: 40.7 cents per gallon, an 18.4% increase since 1993||Virginia: 11.1 cents per gallon, a 6.4% reduction since 1993|
|North Carolina: 37.75 cents per gallon, a 15.9% increase since 1993||New Jersey: 14.5 cents per gallon, a 4% increase since 1993|
|Washington: 37.5 cents per gallon, a 14.5% increase since 1993||South Carolina: 16.75 cents per gallon, a .8% increase since 1993|
|West Virginia: 37.5 cents per gallon, a 15.4% increase since 1993||Hawaii and Oklahoma: 17 cents per gallon, 1% and 6% increases respectively since 1993|
The Tax Policy Center brief applauds 15 states and the District of Columbia that have tied some portion of their gas tax to the actual cost of gas, either at the pump or wholesale. Under this kind of scheme, gas tax revenues increase automatically, producing a more predictable revenue stream. Those that have done this, or something similar, include: California, Hawaii, Illinois, Kentucky, Michigan, Missouri, Nebraska, North Carolina, Oregon, Pennsylvania, and Virginia.
In 2012, the Council on Foreign Relations endorsed these and numerous other options, including bond issues and toll increases, as seen in Ohio, master limited partnership, and real estate investment trusts. Though some of these would only be possible through federal action, the council insisted that the country’s “infrastructure debacle” needs attention. Moving into 2015, more attention may be focused on this problem.
California: Publication helps restaurateurs manage tax issues
According to the 2014 publication by the National Restaurant Industry, restaurants are a driving force in California’s economy. The group reports that in 2013, there were 65,364 eating and drinking places in California, compared with almost one million nationwide. In addition:
- Restaurant sales in California for 2014 were projected at $69.7 billion, compared with $683 billion nationwide. The nationwide figure represents four percent of the U.S. gross domestic product.
- In 2014, restaurants accounted for about 10 percent, or 1.5 million jobs in California. 1.2 million of these jobs are “eating and drinking place” jobs, and the rest are non-restaurant food service positions. In the U.S., about 13.5 million people, 10 percent of the population, work in the restaurant industry.
In light of these numbers, it is not surprising that California is making an effort to assist taxpayers in the restaurant business. For example, in Tax Help for the Restaurant Industry (Tax Help), the California State Board of Equalization (BOE) recently published information to help restaurant owners and managers understand the particular sales and tax issues that impact them.
Tax Help offers a quiz that lets restaurants, caterers, and food truck operators test their knowledge. Here is a sampling of its questions:
- Are complimentary meals taxable? (Not usually, but complimentary carbonated and alcoholic beverages are subject to use tax that is reported and paid by the restaurant on the cost of the item.)
- Is hot food sold to-go taxable? (Generally yes, though “to-go” sales of hot bakery goods and hot non-alcoholic beverages, like coffee for a separate price, are usually not taxable.)
- Is cold food sold for dine-in taxable? (Generally yes, when it is to be eaten at the restaurant.)
- Is food that is not sold, but thrown out, taxable? (No, spoilage, shrinkage, and waste are not taxable but must be adequately documented in case of an audit.)
Tax Help encourages readers to visit the online Tax Guide For Restaurant Owners, which provides numerous resources on all aspects of running a restaurant, including: registration, filing returns, obtaining a seller’s permit, employee meals, discount coupons, sign posting requirements, recordkeeping, and inventory management. It also provides links to special notices, laws, and regulations, and informational pieces featuring topics such as Tips, Gratuities and Services (Publication 115), and Your California Seller's Permit (Publication 73).
Ongoing tax assistance efforts across industries
The BOE is committed to assisting all kinds of businesses in tax related matters. To this end, in mid-December, it issued a release notifying retailers in select Southern California zip codes about upcoming visits from the Statewide Compliance and Outreach Program (SCOP) team. According to the release, “the visits are intended to educate retailers about properly reporting sales and use tax, increase compliance with tax laws, and maintain outreach efforts to assure taxpayers that the state’s tax system is fair and equal for all Californians.”
The release further informs readers that since 2008, SCOP teams have visited nearly half a million businesses statewide. The teams found that more than 98 percent of the California businesses are operating with the correct permits, though noncompliance contributes to more than $2 billion in uncollected sales and use taxes. The BOE collects $56 billion annually in taxes and fees supporting state and local government services.
For additional information regarding these subjects, or any other multistate tax issues, please contact one of the attorneys listed below.