2010 State Tax Update

It is no surprise that the economic recession has resulted in serious revenue shortfalls and driven state legislatures to consider tax increases to support their budgets.

In order to close their budget deficits, many states opted to either pass new legislation that modifies existing tax law or implement new tax measures. For example, many of the legislative changes that states have chosen to implement range from simply imposing tax rate increases to other more creative legislative solutions such as the following:

Modifying state income tax filing methodologies
Adjusting the rules for allocation and apportionment of income
Adopting different nexus standards
Changing certain aspects of conformity to the Internal Revenue Code
Revising related party transaction rules
Imposing limitations on certain deductions
Implementing various tax amnesty programs

These legislative changes will affect a range of state taxes including, but not limited to, personal income taxes, corporate income taxes, and sales and use taxes. Ultimately, each of these modifications shares the common goal of creating the additional revenue necessary to balance state budget deficits. Following is a summary of some of the changes that are effective in 2010:

Personal Income Tax

California increased income tax rates by up to .25% for all income tax brackets for the 2009 and 2010 tax years.
Delaware increased its highest marginal tax rate from 5.95% to 6.95%.
New York passed legislation that adds new tax brackets and tax rates for high net worth individuals. The new provisions are effective for tax years 2009 to 2011 and provide for a highest marginal rate of 8.97% for individuals with taxable income in excess of $500,000.
Colorado and Vermont enacted new provisions which reduce capital gains deductions or exclusions.

While we clearly see a trend towards states imposing tax increases such as those illustrated above, some states have either enacted or are contemplating some form of tax reduction such as the following:

Vermont decreased its highest marginal tax rate by .45%.
New Jersey previously increased its highest marginal tax rate for 2009; however, beginning in 2010, New Jersey’s highest marginal tax rate will revert back to the rate that was in effect for 2008 (a 1.78% reduction in the rate from 2009 to 2010).
The Maine legislature passed a new law that implements a new tax with a top rate of 6.85% - a decrease from the 8.5% rate in effect prior to 2010. The law will be put to a citizens' referendum vote in June 2010.

Corporate Income Tax

Massachusetts, West Virginia and Wisconsin adopted mandatory unitary combined filing provisions for the 2009 tax year (i.e., returns due in 2010).
The District of Columbia enacted legislation that will require unitary combined reporting for tax years beginning after December 31, 2010.
New Mexico recently announced plans to reintroduce combined reporting legislation during the state’s 2010 legislative session.
In conjunction with the switch to unitary combined filing, Massachusetts also lowered the tax rate for the income measure of the state’s excise tax from 9.5% to 8.75%.
Indiana and Pennsylvania modified their apportionment factor weighting methodologies to provide for increased emphasis on the sales factor. The sales factor weighting in both states is now 90%.
New York modified its annual filing fee for flow-through entities to apply to regular partnerships for 2009 tax returns due in 2010.
New Jersey elected to extend the life of its 4% business tax surcharge through tax years ending prior to July 1, 2010. The surcharge was initially scheduled to expire in 2009.
Pennsylvania elected to postpone the phase out of its capital stock and franchise tax until 2014. The tax was originally due to phase out in 2010.

Sales and Use Tax

Beginning April 1, 2009 through June 30, 2011, the California state sales tax rate is raised one percentage point.
The governor of Arizona is advocating a one cent increase in the state’s sales tax that will be in effect for three consecutive years. The proposal may appear on a ballot sometime in 2010.
Kansas reduced its statute of limitations for sales and use tax refunds. The statute was reduced from three years to one year from the due date of the return.
A growing trend that we witnessed among the states over the past twelve months is the adoption of legislation to impose sales tax on digital goods and/or other services provided electronically. Examples of such states include: Kentucky, North Carolina, Vermont, Washington and Wisconsin.

Tax Amnesty Programs

Finally, many states chose to offer tax amnesty to taxpayers in an effort to raise additional revenue. These amnesty programs allow taxpayers who failed to file a return, or underreported tax, to pay the prior year taxes owed while allowing many participants to avoid criminal prosecution, most civil penalties and sometimes a portion of the interest due.

A handful of states already scheduled or proposed amnesty programs that will become effective during 2010. These amnesty programs will apply to most individual and business taxes. The following states have amnesty programs that are scheduled for 2010: District of Columbia, Massachusetts, Maine, Michigan, New York, Pennsylvania and Tennessee.

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