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Joining a handful of other states with tax credits similar to the federal credit authorized by IRC §45D, Alabama has enacted a New Markets Development Credit to encourage investments in businesses in impoverished and low-income communities (see Act No. 2012-483 (H.B. 257)). The credit, which is effective August 1, 2012, is available against Alabama corporate and personal income, financial institutional excise, and premium taxes. However, it only applies to those areas within the state that qualify as a "low income community" under IRC §45D.

 

NOTE: Other states with similar credits include Florida, Illinois, Kentucky, Louisiana, Maine, Missouri, and Oregon.

 

Under the new Alabama law, the purchaser of the "qualified equity investment," or subsequent holder of an investment, earns a vested right to a tax credit equal to 0% of the investment amount for the first year and 8.33% of the investment amount for the next six years (for a total of 50% of the investment amount). There is $10 million limit on investments eligible for the credit. The credit is nonrefundable and may not be sold or transferred; however, unused credits may be carried forward to any of the taxpayer's subsequent taxable years. In addition, tax credits earned by a pass-through entity may be allocated to the owners, and the basis of a qualified equity investment is reduced by the amount of the credit.

 

A "qualified equity investment" is defined as any equity investment in, or long-term debt security issued by, a qualified community development entity (generally as defined by IRC §45D) that does all of the following:

 

• Is acquired after August 1, 2012, at its original issuance solely in exchange for cash;

 

• Has at least 85% of its cash purchase price used by the issuer to make qualified low-income community investments in qualified active low-income community businesses located in Alabama by the first anniversary of the issuance of the qualified equity investment; and

 

• Is designated by the issuer as a qualified equity investment and is certified by the Alabama Development Office (ADO) as not exceeding the $20 million cumulative credit limit (a qualified community development entity that seeks to have an equity investment or long-term debt security designated as a qualified equity investment eligible for the credit must apply to the ADO for certification).

 

The credit is subject to recapture if the federal credit under IRC §45D is recaptured or the taxpayer fails to invest at least 85% of the purchase price of the qualified equity investment in qualified active low-income community investments in Alabama within 12 months.

 

Finally, no landfill or dump – regardless of nature, toxic substance, trash, waste, household, chemical, or otherwise – can qualify for the credit.

Gov. Paul LePage's supplemental budget plan, which was signed into law on May 16, will help reduce the income tax burden for retirees and certain members of the military beginning with the 2014 tax year (see Ch. 657 (S.P. 600), Laws 2012).

 

For retirees, the limit on the personal income tax deduction for certain retirement benefits is raised from $6,000 to $10,000 (reduced by the total amount of the taxpayer's Social Security benefits and federal railroad retirement benefits). The deduction is also expanded to include all federally taxable pension income, annuity income, and IRA distributions, except pick-up contributions for which a deduction has been allowed.

 

The new law also creates a personal income tax exemption for active duty military pay earned outside of Maine for service performed pursuant to written military orders. This includes compensation received as a result of service in the active or reserve components of the U.S. Army, Navy, Air Force, Marines or Coast Guard, including all military duty performed as a member of the state military forces.

 

Other tax provisions in the supplemental budget bill include:

 

New Markets Tax Credit – The maximum amount of capital or equity investment in, or loaned to, a qualified active low-income community business is increased from $10 million to $40 million if the business is a manufacturing or value-added production enterprise that projects to create or retain more than 200 jobs.

 

Sales Tax on Wood Harvesting Equipment – The sales tax exemption for depreciable machinery or equipment used in certain types of production is expanded to include commercial wood harvesting.

 

Use Tax Compliance Program – Taxpayers may pay use tax liabilities that have not been assessed beginning September 1, 2012, and ending November 30, 2012. The program applies to use tax liabilities incurred during a look-back period extending from 2006 to 2011.

Gov. Jan Brewer has signed a comprehensive income tax bill that she hopes will remove any "lingering obstacles to job growth" in Arizona (see H.B. 2815, Laws 2012). Among other things, the legislation:

 

• Creates a new deduction for a portion of the net long-term capital gain included in federal AGI that is derived from an investment in a capital asset acquired after 2011 (the deduction amount is set at 10% for 2013, 20% for 2014, and 25% after 2014).


• Extends the NOL carryforward period from five years to 20 years for corporate income tax purposes.


• Allows a bonus depreciation deduction for individual income tax purposes equal to 10% of the amount allowed pursuant to IRC §168(k) for property placed in service in taxable years beginning after 2013.


• Authorizes a new corporate and individual income tax credit for capital investment in a new or expanding manufacturing, headquarters, or research facility in the state after June 30, 2012 (the amount of the credit is 10% of the lesser of the total qualifying investment, or $200,000 for each net new full-time employment position at the facility).


• Extends the renewable energy operations credit to taxable years beginning through 2019 (previously, 2014).

• Eliminates the 400-employees-per-employer-per-year cap on quality jobs credits for taxable years beginning after 2012 (a new provision also specifies that the capital investment and new qualified employment positions requirements for the credit must be accomplished within 12 months after the start of the required capital investment).

Michigan Governor Rick Snyder has sent a letter to the leadership of the U.S. Senate urging the passage of the Marketplace Fairness Act (S. 1832) in order to collect sales tax from online and other remote retailers. According to Snyder, allowing remote retailers to avoid paying sales and use taxes "provides them an unfair competitive advantage and threatens the viability of retailers throughout our communities…." The letter goes on to say that Michigan expects to experience a loss of about $872 million in revenue due to online and mail order purchases during fiscal years 2012 and 2013. Currently, Michigan taxpayers are required to report and remit use tax on remote sales on either their individual purchase use tax returns or income tax returns, but rarely do so.

 

Online retailer, Amazon, collects sales tax in four states in which it has distribution facilities, and in New York, due to the enactment of its click-through nexus law. In the absence of federal legislation on the issue, Amazon has reached agreements with seven other states (Texas, Nevada, Tennessee, Indiana, Virginia, California, and South Carolina) to begin the collection of sales tax by a specified future date. In Texas, for instance, Amazon will begin collecting sales tax on July 1, 2012.

As Julie Minor of CCH recently reported, the Tennessee Department of Revenue has issued a Letter Ruling stating that a taxpayer that manages awards programs for clients throughout the United States is subject to the state's sales tax on award merchandise shipped to program participants in Tennessee. The fees paid to the taxpayer by its clients are not taxable, however, because the taxpayer's management of awards programs is considered a nontaxable service.

 

The taxpayer charges the fees to its clients when award points are issued to program participants' database accounts, and the parties do not know whether the points will be redeemed or what type of awards the points will be used for -- merchandise, which is taxable, or a gift card or gift certificate, which is not taxable.  

 

Participants in the taxpayer's awards program accumulate points in a database account and receive statements from the taxpayer showing their respective balances.  Points are redeemed for awards featured in a catalog sent to each participant at the beginning of a program. There is no dollar amount associated with the points, and no cash value is communicated to the participant relating to the value of the points. Participants do not have the option of paying cash for an item featured in the awards catalog.

 

The taxpayer buys award merchandise from third party suppliers in its own name, not as an agent for its clients. The taxpayer sometimes uses a resale certificate to make these purchases. Clients do not take possession of or title to the award merchandise. When award merchandise is ordered by a participant, the taxpayer ships the merchandise directly to the participant from its warehouse outside Tennessee. For an undisclosed reason, the issue of nexus is not addressed in the letter ruling. 

 

The Department of Revenue reasoned that the taxpayer is a dealer making a taxable retail sale whenever award merchandise is shipped to a participant in Tennessee. A retail sale takes place in this situation because (1) title and possession of tangible personal property is transferred to the participant; (2) the transfer is made in exchange for consideration, which is in the form of the award points that have value; and (3) the participant does not purchase the merchandise for resale, sublease, or subrent. 

 

The taxable sales price of an item of merchandise is generally the per-point-fee that the taxpayer charges a client, multiplied by the number of points that a program participant redeems in order to obtain the item, because the points are the consideration received by the taxpayer since they can be valued in money. The taxpayer receives a certain amount of money for each point awarded to a participant, so the department reasoned that the per-point fee constitutes the value to the taxpayer of each point.

 

The department's Letter Ruling requires the taxpayer to either charge sales tax on the sales price of a particular item or indicate on the participant's receipt or invoice that the stated price of the item includes the applicable sales tax. If the receipt or invoice does not indicate that the stated price includes the tax, the taxpayer will have to collect and remit the tax due on the sales price. In this case, the sales price is the per-point-fee multiplied by the number of points the participant redeemed to obtain the item.  However, if the receipt or invoice indicates that the stated price includes the tax, the sales price is the value of the points redeemed minus the tax.

 

The South Carolina House and Senate have passed different versions of a bill that would exempt from sales and use taxes purchases of electricity, computer equipment, hardware, and software by a data center. In order to be eligible for exemption, a qualifying taxpayer would need to invest at least $50 million in real or personal property over a five year period and create at least 25 full-time jobs which would be maintained for three consecutive years. If more than one taxpayer seeks exemption for a data center, an aggregate capital investment of at least $75 million in real or personal property over a five year period would be required.

 

If a taxpayer fails to meet the hiring and investment conditions at the end of the five year period, the Department of Revenue would assess the state and local sales and use taxes due on purchased items. The exemption would be available only to those data centers certified by the Department of Commerce prior to January 1, 2032.

 

As passed by the Senate on March 27, 2012, the exemption would have applied to data centers first placed in service after July 1, 2012. On May 1, 2012, the House amended the bill to include companies already in South Carolina that meet the specified criteria. If the Senate gives final approval, the bill goes to Governor Haley for signature or veto.

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