With the excitement surrounding the prospect of federal tax reform, plus more than half of the states facing revenue shortfalls, state tax policy is likely to be one of the most prevalent issues at the state legislative level in 2017.
With the assistance of tax experts at MultiState Associates, which provides ISRI’s legislative and regulatory monitoring service to ISRI members, we have compiled a preview of some of the tax matters that are expected to take stage front and center in states around the nation this year.
Sales Tax Compliance/Manufacturing Sales Tax Exemption
In the early parts of this decade, states across the nation looked to jump-start their job machines by easing some of the tax burden on businesses and offering tax credits and incentive packages, particularly for manufacturers. With great vigilance and some serious lobbying efforts, recyclers in several states got in on the benefits and there is no reason to think this trend could not continue if ISRI members play their cards right. For instance, ISRI members in at least three states (FL, NC, and IN) recently secured the exemption through legislative amendments to the state tax code.
Most states that impose a sales tax will often grant an exemption from sales taxes for machinery and equipment used in the manufacturing process, including sometimes repair parts and supplies. This includes recycling equipment in several – but not all – states. ISRI members may be accorded the manufacturers’ sales tax exemption in each state where the exemption exists, except in those states where a manufacturer is defined as a business having a specific SIC code. This has led to various interpretations by regulators that resulted in the need for legislative clarification.
As states continue to look for revenue sources, they are beginning to reexamine the various tax exemptions they afforded and have begun to question those applying for the manufacturing sales tax exemption. The problem lies in the definition of manufacturing, or the state department of revenue’s interpretation of the definition. Frequently, a key point is when does manufacturing begin and end? State tax commissioners, in an effort to boost sagging state revenues, are attempting to collect a sales or use tax on any equipment used before manufacturing begins and after manufacturing ends. This can pose a problem for recyclers who cannot clearly and distinctly describe in their operations when “scrap processing” begins and ends; a problem that could cost recyclers thousands of dollars in sales and use taxes.
A good case study on the importance of this matter can be found in North Carolina. Following a North Carolina Department of Revenue audit in 2013 of three metal recyclers, the industry there found itself facing tax assessments in the hundreds of thousands of dollars due to the fact that the state applied the privilege tax (similar to a sales tax) incorrectly to certain equipment purchased by recyclers. The Department refused to budge on its position resulting in the need for legal and legislative action. With the assistance of ISRI, the industry’s state lobbyist and experts developed a legislative strategy culminating in the introduction of legislation designed to secure the exemption once and for all. Two new tax provisions were enacted representing a significant victory for metal recyclers. For the first time, secondary metals recyclers now have provisions related to the 1%/$80 privilege tax and sales tax exemption on fuel written into State law. The effective date of the changes was July 1, 2016.
Sales Tax “Nexus” Legislation
One of the biggest state tax trends we saw last year was legislation aiming to ensure that as many sellers as possible comply with sales tax laws (particularly remote, out-of-state sellers). While the media has been primarily focused on the online transactions subject to this debate, recyclers who sell and/or broker sales in multiple states need to pay attention. Because Congress has failed to act to resolve this issue, states have pushed forward on their own with varying strategies designed to collect more sales taxes on those businesses who do not have a physical operation in the state.
Overall, last year we saw 42 bills introduced in 16 states last year, with five bills ultimately enacted (Alabama, Louisiana, Oklahoma, South Dakota, and Vermont). States used a variety of approaches to achieve enhanced compliance. The first was legislation changing nexus requirements. These types of bills took several forms—some states created affiliate or economic nexus requirements, while others imposed requirements on marketplace providers of required referral registration. The second approach was legislation imposing reporting or notification requirements. The third “approach” is less of an approach and more of a catch-all category for those states that didn’t pursue the first two strategies (for example, legislation preparing for federal action or legislation to study the topic further).
2017 will be no different—eight states have introduced 11 nexus bills so far (Indiana, Minnesota, Mississippi, Nebraska, South Carolina, Virginia, Washington, and Wyoming). The Wyoming bill, which is patterned after last year’s South Dakota legislation, already passed the first chamber and will now move on to the state senate.
Scaling Back and Phasing Out Tangible Personal Property Taxes
Tangible personal property (TPP) taxes are levied on movable property (as opposed to real property, such as land and buildings). The name itself is misleading because most TPP taxes aren’t “personal,” but are instead primarily levied on business and commercial TPP due to widespread exemptions for household TPP. In some states, these taxes are referred to as “inventory taxes” because the tax is levied on business inventory. In most states, however, inventory is exempted (it is only taxable in 11 states, according to Commerce Clearing House).
Tax experts and lawmakers alike have increasingly recognized that these taxes aren’t smart tax policy. Last year, both the National Conference of State Legislatures (NCSL) and the American Legislative Exchange Council (ALEC) passed documents urging state legislators to move away from TPP taxes. ISRI is a partner with NCSL as a Platinum Sponsor of the NCSL Foundation for State Governments and inquired about the NCSL position.
According to NCSL,
“Taxes on business personal property do not align with common principles of taxation (such as neutrality, efficiency, transparency, benefit, or ability-to-pay); distort markets by discouraging capital investment, expansion, and replacement; and impose high administrative and compliance costs. Since property taxes are primarily a local revenue source, the current business personal property tax system is characterized by inconsistency within states regarding property classification, assessment methods and ratios, and other rules, creating complexity and confusion for taxpayers.”
Recognizing the economically detrimental nature of personal property taxes, most states have enacted provisions limiting their scope or simplifying administration, and several have eliminated them altogether.
Thirteen states considered bills to limit or eliminate TPP taxation last year, and that momentum has continued in 2017. As of mid-January, we’ve already seen 10 bills introduced in eight states (California, Colorado, Connecticut, Indiana, Missouri, Nebraska, South Carolina, and Texas). Most of these bills expand existing TPP tax exemptions, exclusions, or credits, which would whittle down the tax base (California, Colorado, Indiana, Nebraska, and South Carolina), while a few phase out the tax over a number of years (Connecticut and Texas), and one eliminates the tax altogether (Missouri).
Combined Reporting and Corporate Income Tax Apportionment
Last year, 24 bills related to mandatory unitary combined reporting (MUCR) were introduced in 12 states. These proposals often—but not always— have a partisan flavor, with Democratic legislators sometimes arguing that combined reporting makes the corporate income tax fairer. On the other hand, when Republican legislators propose such bills, they are often associated with tax rate reductions, but these proposals generally fail due to business community opposition to this complicated tax regime and uncertain revenue estimates.
Of the 24 bills, most sought to adopt MUCR. A few in Connecticut attempted to repeal the recently adopted MUCR law. Others fiddled with definitions of existing combined reporting rules. Only one of these introduced bills introduced was ultimately enacted, but it was stripped of most of its weight prior to passage–legislation in Indiana began as a MUCR bill but was later turned into a bill dictating that the legislature study the topic. Ultimately, the report from the study did not support further pursuit of the issue this session.
Because 31 states are experiencing budget shortfalls this year, we expect combined reporting legislation to be prevalent. However, because it frequently has partisan overtones, Democrats are at historic lows in legislative control, and it has not been proved to be a significant revenue generator, we are skeptical that any new states will adopt the tax scheme this year. As of mid-January, we count seven bills related to combined reporting in six states (Connecticut, Missouri, Montana, New Mexico, Oregon, and Virginia, in addition to five New Jersey carryover bills), and expect additional proposals as more states move further into their legislative sessions. Our friends at MultiState Associates have written a detailed analysis, which ISRI members may access online through the State Policy webpage at ISRI.org/state.