This is where we announce recent tax, legal, and regulatory news developments that may be of major importance to your small business. If you've visited us before or own one of our state-by-state "Starting and Operating a Business in ..." (CA, NY, etc.) business guidebooks, and want to know what has changed lately, take a look here first. The "Starting and Operating in ..." books have all been updated for the 2005 Energy and Transportation Acts (tax law changes) and, in 2006, for the Tax Increase Prevention and Reconciliation Act that was passed in May, 2006, as well as the Pension Protection Act of 2006 (signed into law by President Bush on August 17, 2006) and the Tax Relief and Health Care Act of 2006 (signed into law on December 20, 2006). All editions have also been updated for the Small Business and Work Opportunity Act of 2007, which was enacted on May 25, 2007, raising the federal minimum wage and making a number of important federal tax law changes, and also for last-minute tax changes enacted by Congress in December, 2007.

As always, the books in this series are always remarkably up-to-date. They have to be, since old, out-of-date legal or tax information is worse than useless -- it is dangerous!

SINCE THIS PAGE IS UPDATED FREQUENTLY, BE SURE TO HIT THE "REFRESH" BUTTON ON YOUR BROWSER IF YOU HAVE VISITED THIS PAGE BEFORE!

Listed below are highlights of recent significant federal and state tax, legal and other developments, each of which is excerpted from one of the 51 various editions of the "Starting and Operating a Business in the U.S." book series. (All such excerpts are from "generic versions" of the books, which have not been customized for a particular user -- the Small Business Advisor software that installs the books for you will create either a generic version or a customized version, at the user's option.)

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FEDERAL/NATIONAL DEVELOPMENTS:

FROM CHAPTER 2 (IN ALL S&O EDITIONS). Under new IRS regulations, an LLC that makes an S corporation election by filing Form 2553 will now automatically be considered a corporation. Previously, it was necessary for an S corporation to first file a Form 8832 to elect to be classified as a corporation for tax purposes before it could then file an S corporation election on Form 2553.

FROM CHAPTER 5 (IN ALL S&O EDITIONS). In 2007, the S.E.C. commissioners proposed an S.E.C. rule change to Regulation D that would change the definition of an "accredited investor" under the federal securities laws. If adopted, the new rule would provide an alternative definition of "accredited investor," instead of the $1 million net worth requirement, if the investor had at least $750,000 of investment assets.

The proposed new rules would also create a new class of "large accredited investors," who would have to have at least $2.5 million of investment assets, not counting a personal residence, or else have $400,000 of income a year ($600,000, if counting the spouse's income also) for the last two years and the expectation of maintaining the same income level for the current year.

An accredited investor is one who is assumed, under federal securities laws, to be sufficiently sophisticated that he or she need not be provided various types of information that are required for the investing public, generally, when a company issues securities. If the proposed rules are adopted, the new class of "large accredited investors" could be provided advertising for a securities offering. The new rules will mainly affect "hedge funds," which are able to offer shares to wealthy investors without going through a costly S.E.C. securities registration.

FROM CHAPTER 5 (IN ALL S&O EDITIONS). The IRS has announced the 2008 taxable wage base for the OASDI portion of the self-employment tax and FICA tax, which will be $102,000. This is the amount of earned income for an individual on which the 15.3% self-employment tax must be paid and on which FICA (Social Security) taxes on wages must be paid in 2008. For 2007, the wage base was $97,500. Only the 2.9% Medicare portion of the 15.3% tax applies to income in excess of the taxable wage base amount.

FROM CHAPTER 6 (IN ALL S&O EDITIONS). The 6.2% Federal Unemployment Tax (FUTA) rate was scheduled to decrease to 6.0% (in theory -- it always gets extended). However, as usual, Congress passed last-minute legislation in December, 2007 that has extended the 6.2% tax rate for another year.

FROM CHAPTER 6 (IN ALL S&O EDITIONS). Effective July 24, 2007, the federal minimum wage was increased, for the first time since 1997, from $5.15 an hour to $5.85. It increases again to $6.55 an hour on July 24, 2008 and to $7.25 an hour on July 24, 2009.

FROM CHAPTER 6 (IN ALL S&O EDITIONS). The IRS formerly provided a Form 940-EZ,, which was a a greatly simplified Federal Unemployment Tax (FUTA) return for certain small employers. However, in 2007 the regular Form 940 has been redesigned and simplified (so says the IRS), and is now to be used by all employers for reporting FUTA tax. If you were using Form 940-EZ before, you must now begin using the redesigned Form 940.

FROM CHAPTER 8 (IN ALL S&O EDITIONS). Effective January 1, 2007, the Value Added Tax (VAT) tax rate in Germany increased to 19% (formerly 16%). On the same date, Romania and Bulgaria became part of the European Union (EU), and now impose VAT taxes at the rates of 19% and 20%, respectively. (For American businesses, collection and payment of European VAT taxes is chiefly an issue only for companies selling to consumers -- not businesses -- in the EU, such as sales of software on the Internet.)

FROM CHAPTER 8 (IN ALL S&O EDITIONS). The Internet Tax Freedom Act, a federal law which has imposed a moratorium on taxation of Internet access by the states since 1998, due to expire on November 1, 2007, was extended by Congress on October 30, 2007 for another 7 years, to November 1, 2014.

FROM CHAPTER 9 (IN ALL S&O EDITIONS). The new federal bankruptcy act that went into effect in late 2005 has added to and clarified the asset protection treatment of various types of tax-qualified retirement plans, including IRAs. For details and analysis of these new bankrupcty exemptions, and similar state laws in the various states, see the current state edition of the Starting and Operating a Business in the U.S. book series for your particular state. (Ordering information at: www.roninsoft.com/sbzorder.htm.)

FROM CHAPTER 11 (IN ALL S&O EDITIONS). Under the Small Business and Work Opportunity Tax Act of 2007, enacted by Congress in May, 2007, the $100,000 first-year expensing deduction for certain depreciable property is increased to a $125,000 deduction in 2007, indexed for inflation in subsequent years ($128,000 in 2008). Also, the amount of such property that may be acquired before that deduction begins to phase out was increased from the previous level of $400,000 to $500,000 in 2007, also indexed for future inflation (to $510,000 for 2008). In addition, the date on which this increased deduction reverts back to the old (pre-2003) level of $25,000 has been moved up one year, from January 1, 2010 to January 1, 2011.

FROM CHAPTER 11 (IN ALL S&O EDITIONS). Under the Small Business and Work Opportunity Tax Act of 2007, enacted by Congress in May, 2007, almost all small businesses with annual gross receipts of $10 million or less will now be allowed to use the cash method of accounting and those with inventories will no longer be required to use inventory accounting, for taxable years that begin after the May 25, 2007 date of enactment (the 2008 tax year for calendar year taxpayers).

FROM CHAPTER 11 (IN ALL S&O EDITIONS).In the Economic Stimulus Act of 2008, Congress has temporarily restored 50% bonus depreciation, for qualifying depreciable assets purchased and placed in service during calendar year 2008. In addition, Section 179 expensing has been increased further, from $125,000 in 2007 to $250,000 and the investment threshold amount at which the Section 179 deduction begins to phase out has been increased from $500,000 in 2007 to $800,000, for taxable years that begin in 2008.

FROM CHAPTER 12 (IN ALL S&O EDITIONS). The IRS has announced various inflation adjustments to pension and fringe benefit items for 2008. Thus, the maximum deductible contribution for an individual participant is increased to $46,000 (from $45,000 in 2007) for a defined contribution pension or profit sharing plan, and the maximum annual benefit that may be actuarially funded in a defined benefit pension plan is increased to $185,000 in 2008 (from $180,000 in 2007). The maximum amount of compensation on which pension plan contributions can be computed is increased from $225,000 in 2007 to $230,000 for 2008. Elective contributions to a 401K plan remain limited to $15,500 per participant, the same as in 2007.

FROM CHAPTER 12 (IN ALL S&O EDITIONS). The IRS has finalized its regulations under Section 409A, effective as of April 17, 2007. All nonqualified deferred compensation arrangements must be in writing and in compliance with Section 409A no later than December 31, 2007. However, in November, 2007, the IRS announced that the deadline for full compliance would be extended another year, to December 31, 2008, in IRS Notice 2007-86.

Plans are not required to be amended retroactively to cover the period from the January 1, 2005 effective date of Section 409A through the end of the transition period, but they must show operational compliance with the rules during that time. The final regs make only minor changes from the previously released Proposed Regulations, such as allowing an employer to delay payment of deferred compensation if making payment would jeopardize the employer's ability to continue to operate as a going concern.

FROM CHAPTER 12 (IN ALL S&O EDITIONS). Under provisions of the Pension Protection Act of 2006, the income limits for individuals to make deductible IRA contributions, as well as the income limits for making contributions to Roth-IRAs, are indexed for inflation, in $1,000 increments, beginning in 2007.

FROM CHAPTER 12 (IN ALL S&O EDITIONS). Under new federal tax legislation enacted on December 20, 2006, effective beginning with the 2007 tax year, the maximum deduction for contributions to a Health Savings Account (HSA) is no longer limited by the HSA's annual insurance policy deductible amount. Instead, the only limitation will be a fixed dollar amount, indexed for inflation ($2,800 for a self-coverage HSA plan, or $5,650 for a family coverage HSA in 2007). In addition, the new law provides that the initial contribution for a new HSA started mid-year will now be the full-year limitation, rather than a fraction of the full-year amount, beginning in 2007.

FROM CHAPTER 12 (IN ALL S&O EDITIONS). Tax advisers (and small businesses) should take note of a recent (2006) Tax Court case, Peter F. and Maureen L. Speltz v. Commissioner, TC Summary Opinion 2006–23, dealing with medical reimbursement plans for an employee-spouse. In this case, the IRS sought to disallow an arrangement where a wife, Maureen Speltz, a licensed day care provider, hired her husband for various duties as a part-time employee of the daycare business, providing him with medical reimbursement plan benefits. She paid him no salary, but a medical reimbursement plan was established (unwritten, but communicated to employees in a written announcement), which provided he could receive up to $6,500 a year in medical expense reimbursements in lieu of cash salary or wages.

The Tax Court fully upheld the taxpayer's deductions, since the husband was found to be a bona fide employee and the amount he was reimbursed was less, for the hours he had worked, than his wife would have had to pay an unrelated employee, so that his compensation was not unreasonable.

FROM CHAPTER 13 (IN ALL S&O EDITIONS). The Tax Relief and Health Care Act of 2006, signed into law by President Bush on December 20, 2006, extended for two more years, until December 31, 2007, various tax credits and deductions that had expired at the end of 2005, including:

• Archer Medical Savings Accounts, which were to have been phased out at the end of 2005;
• The 15 year amortization of certain "qualified leasehold improvement property" and "qualified restaurant property";
• The R & D (research and development) Tax Credit;
• The Work Opportunity Tax Credit for hiring certain disadvantaged categories of workers; and
• The Welfare-To-Work Tax Credit for hiring certain individuals who were receiving family assistance.

Each of the above items was retroactively reinstated, as of January 1, 2006, by the new law.

The 2006 law also extended various energy incentives that were enacted in 2005 and due to expire at the end of 2007 for another year, to December 31, 2008, including tax credits for homebuilders for construction of energy-saving homes, tax credits for homeowners for certain solar energy items, and incentives for construction of energy-efficient commercial buildings.

FROM CHAPTER 13 (IN ALL S&O EDITIONS). In May, 2007, Congress enacted the Small Business and Work Opportunity Tax Act of 2007, which extended the Work Opportunity Tax Credit another year, due to expire on December 31, 2007, to a new expiration date of August 31, 2011. In addition, it extended the 15-year depreciation period (instead of 39 years) for "qualified restaurant property" and "qualified leasehold improvement property" to such property placed in service before April 1, 2008. The new law also reduced the depreciation period to 15 years for "qualified retail improvement property" for certain improvements made to retail stores before April 1, 2008.

FROM CHAPTER 13 (IN ALL S&O EDITIONS). The Katrina Emergency Tax Relief Act of 2005 (KETRA) adds to the categories of employees you can hire who qualify for the Work Opportunity Tax Credit those individuals who lived in the disaster area and lost their jobs due to Hurricane Katrina, if hired in the period beginning on August 29, 2005 and ending December 31, 2005. (Thus, you can now earn this tax credit without having to hire "qualified ex-felons" or "high-risk youths.")

In lieu of the usual certification that an employee qualifies for the Work Opportunity Credit, KETRA allows an employer to rely on reasonable evidence that the employee worked or lived in the disaster area on August 28, 2005 -- such as a Louisiana driver's license showing a New Orleans area address, or a voter registration card or utility bill.

Employees whose wages also qualify for the tax credit include those who are hired for a job that is located in the Katrina disaster area, during a two-year period beginning August 29, 2005. The latter credit is allowable despite the fact that the Work Opportunity Tax Credit expired, otherwise, on December 31, 2005. (But has since been retroactively revived until December 31, 2007, by the Tax Relief and Health Care Act of 2006, enacted December 20, 2006.)

FROM CHAPTER 13 (IN ALL S&O EDITIONS). A new special tax deduction, designed to encourage businesses to produce goods, do construction, or engage in mining or extraction activities in the United States, the Domestic Production Activities deduction, went into effect in 2005. This new tax law allows taxpayers a deduction equal to the lesser of:

• The taxable income of your corporation (it cannot create a tax loss) or, in the case of an individual taxpayer your adjusted gross income, with certain modifications; or
• 9% of your company's "qualified production activities income" for the taxable year. However, the 9% deduction is being gradually phased in, and is limited to 3% in 2005 and 2006, and to 6% in 2007, 2008, and 2009, finally becoming 9% in 2010; or
• 50% of the Form W-2 wages reported for the tax year -- thus, for a sole proprietorship, partnership or LLC that has no employees and pays no W-2 wages, the "Domestic Production Activities" deduction is not available.

However, a 2006 tax law amendment, effective for tax years beginning after May 17, 2006, now limits the deduction to 50% of W-2 wages "allocable to domestic production gross receipts," rather than 50% of ALL W-2 wages of the taxpayer entity, which will significantly reduce this deduction for many businesses. On the other hand, the 2006 amendment also simplifies and liberalizes the rules for the pass-through of W-2 wage expenses to partners in a partnership, members of an LLC, or shareholders of an S corporation, so that a previous limitation on the amount of such wages that could be allocated to an owner of a pass-through entity has been repealed.

PLANNING POINT:

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Because the new (2006) law amendment limits the Domestic Production Activities deduction to 50% of W-2 wages that are allocable to such production receipts, employers who plan to claim the Domestic Production Activities deduction will need to design and implement recordkeeping systems to track the portion of employees' time (and pay) that is devoted to domestic production activities. This may require setting up separate general ledger accounts to break wages down into two components -- wages that relate to domestic production gross receipts and wages that do not.

In addition, if Your Company has qualifying income from domestic production activities and you outsource some of your work to independent contractors, you may want to consider the costs vs. benefits of bringing some of that work back in-house, by hiring employees, to generate a larger W-2 portion of your expenses and thus increase the amount of the Domestic Production Activities deduction that your business may take -- if the 50% of W-2 expense limitation would affect the amount of the deduction you can take.

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For a detailed analysis of the new Domestic Production Activities deduction, and whether your particular type of business is likely to be eligible for this major federal income tax incentive, see Chapter 13 of the current edition of any of the 51 state versions of the Starting and Operating a Business in ...(state) books. (Ordering information at: www.roninsoft.com/sbzorder.htm.)

FROM CHAPTER 14 (IN ALL S&O EDITIONS). A new tax law passed by Congress in May, 2007 extends the "Kiddie Tax" on unearned income of children, beginning in 2008. Under prior law, only the income of children under the age of 14 was taxable at their parents' tax rates, and the age limit was bumped up to 18 in 2006 and 2007. Under the new law, starting in 2008, the Kiddie Tax can apply, generally, to the unearned income of a child up to the age of 19 (24, if a student), where the child's earned income does not provide more than half of his or her support. (This is basically the same age rule as is used in determining whether a child can be claimed as a dependent.)

FROM CHAPTER 14 (IN ALL S&O EDITIONS). The new 2007 tax law enacted in May, 2007 provides for a simplification of the tax treatment for a "qualified joint venture" owned solely by a husband and wife. The new law lets the couple elect, if filing joint returns, to treat the venture as a sole proprietorship for each spouse, depending on the ownership of each, rather than being required to treat the business as a partnership or file partnership tax returns. Both spouses must elect to treat their business as a "qualified joint venture" to obtain the favorable treatment. Each spouse will also report his or her share of the self-employment income for purposes of the self-employment tax.

FROM CHAPTER 16 (IN ALL S&O EDITIONS). The IRS has announced various inflation adjustments that are relevant to estate planners for 2008. The $12,000 annual gift tax exclusion remains unchanged from that amount in 2007. However, the maximum exclusion from the taxable estate for certain real estate used in a farm or family-owned business will be $960,000 for the estates of individuals who die in 2008 (increased from $920,000 in 2007).

STATE DEVELOPMENTS:

The following state-by-state small business news items are excerpted from the state information sections of each of the 51 state and D.C. editions of the Starting and Operating a Business in ... (CA, NY, PA, etc.) e-books:

ALABAMA EDITION. The new employer tax rate for Alabama unemployment tax purposes in 2008 is 2.7% on the first $8,000 of covered wages, unchanged from 2007.

ALABAMA EDITION. Effective October 2, 2006, business taxpayers making single tax payments totaling $750 or more (formerly $25,000) to the Alabama Department of Revenue are now required to make those payments through electronic funds transfer.

ALASKA EDITION. Until recently, Alaska's laws did not allow professional service firms to organize as LLCs. However, legislation enacted in 2007 will now allow professional service LLCs to be formed in Alaska.

ALASKA EDITION. Voters in Fairbanks, in municipal elections on October 3, 2006, approved an amendment to the city charter which limits property taxes to a maximum rate of 0.5 mills, unless voters approve a higher rate at a general election. Another amendment to the city charter requires that any new or additional sales taxes, other than hotel/motel, alcohol, and tobacco taxes, must also be approved by voters in a general election.

ARIZONA EDITION. Effective as of January 1, 2008, a new Arizona law went into effect, prohibiting employers from hiring unauthorized aliens, one of the toughest such laws in the nation. Multiple violations of the Arizona Legal Workers Act by an employer may result in temporary or permanent suspension of all state and local licenses of the offending business.

ARIZONA EDITION. In the November, 2006 election, Arizona voters passed an initiative (Proposition 202) to institute a state minimum wage of $6.75 an hour, beginning January 1, 2007, and indexed for inflation in each subsequent year. Arizona previously did not have a state minimum wage law.

ARKANSAS EDITION. Effective March 28, 2007, Arkansas has adopted a new 33 1/3% tax credit for qualifying equity investments in certain targeted businesses. These include businesses in the six following industry groups:

• Advanced materials and manufacturing systems;
• Agriculture, food, and environmental sciences;
• Biotechnology, bioengineering, and life sciences;
• Information technology;
• Transportation logistics; and
• Bio-based products.

[ARK. STAT. ANN. Sec. 15-4-2703(43)(A)]

A number of other qualifications and requirements must also be met to obtain the tax credit. These include being a new business, operating in the state for less than 5 years; paying employees not less than 150% of the county or state average wage; and having been selected to receive special benefits and obtaining approval after filing an application for the tax credit with the Department of Economic Development. [ARK. STAT. ANN. Sec. 15-4-2703(43)(B)] However, don't count on easily qualifying to receive this tax benefit -- the state will only authorize a total of $6.25 million a year of such credits to be granted.

ARKANSAS EDITION. Effective January 1, 2008, the limitation of local sales and use taxes to the first $2,500 of a transaction will only apply to sales of motor vehicles, aircraft, watercraft, and modular, manufactured or mobile homes. Also effective on that date, the state sales and use tax rate on food and food ingredients (but not on alcoholic beverages or prepared food) is reduced from 6% to 3%. Local taxes on food and food ingredients are not changed.

ARKANSAS EDITION. Effective October 1, 2006, the Arkansas minimum wage increased from $5.15 to $6.25 an hour. [ARK. STAT. ANN. Sec. 11-4-210 (1987)]

CALIFORNIA EDITION. The withholding rate for California State Disability Insurance (SDI) increased in 2008 to 0.8% of covered wages, up from .6% in 2007. The amount of wages subject to withholding, which was $83,389 in 2007 increased to $86,698. Thus, due to the higher tax rate and increases taxable wage bas, the maximum that must be withheld in 2008 has increased from $500.33 in 2007 to a maximum of $693.58 in 2008, an increase of 39%.

CALIFORNIA EDITION. Effective for real estate sales occurring on or after January 1, 2007, a seller may elect to have tax withheld at the highest applicable tax rate (for individuals or corporations), on the taxable gain, rather than at a 3 1/3% rate on the total sales price. (Thanks, guys!) [CAL. REV. & TAX CODE Sec. 18662(e)(2)(B)]

CALIFORNIA EDITION. California law has allowed for domestic partners since 2003, but has not allowed domestic partners to file joint income tax returns. However, the state tax law has been amended to allow domestic partners to file joint returns, beginning with the 2007 taxable year. (Note, however, that joint Federal income tax returns may only be filed by married couples.)

CALIFORNIA EDITION. Effective January 1, 2007, the Franchise Tax Board is be allowed under a new California law to provide for the filing of a group tax return for nonresident directors of a corporation, where the directors are compensated for attending board meetings in California. This considerably simplifies tax compliance for such nonresident directors, who were previously required to individually file nonresident California income tax returns to report their directors' fees earned in California. [CAL. REV. & TAX CODE Sec. 18536]

CALIFORNIA EDITION. The California minimum wage increased from $7.50 an hour to $8.00 an hour on January 1, 2008. San Francisco's local minimum wage, which was increased in 2004 to $8.50 an hour, indexed for inflation, is now (in 2008) $9.36 an hour.

CALIFORNIA EDITION. Under legislation enacted on July 12, 2006, the California environmental tax, which formerly applied only to corporations, was extended to all types of legal entities, including LLCs, partnerships, and sole proprietorships, effective on January 1, 2007

CALIFORNIA EDITION. New California legislation gives same-sex couples who have registered as domestic partners a property tax break previously reserved only for married couples who transfer real estate to one another. Beginning with the 2006-2007 fiscal year property tax lien date, a transfer of real property between registered domestic partners is no longer considered a "change of ownership" that would previously have triggered a reassessment of the property at its current fair market value, under the provisions of Proposition 13. Also, domestic partners who had property reassessed due to a transfer of ownership between themselves on or after January 1, 2000 may apply to the county assessor for a reversal of the reassessment. [CAL. REV. & TAX. CODE Sec. 62(p)]

CALIFORNIA EDITION. The California Legislature has extended the date at which architectural LLPs will no longer qualify for LLP status from January 1, 2007 to January 1, 2012, but has also increased the minimum liability insurance required for an architectural LLP from $500,000 currently to $1 million, effective January 1, 2008.

CALIFORNIA EDITION. Under 2007 tax legislation, a 40% penalty may now apply to a business that collects California sales or use tax and fails to pay it over to the state. In addition, tax withheld on behalf of out-of-state contractors or nonresident owners of S corporations, partnerships, or LLCs will have to be remitted quarterly, beginning in 2008.

COLORADO EDITION. Effective July 1, 2007, corporations subject to Colorado oil and gas severance taxes must make monthly estimated tax payments of corporation income tax, electronically, on the 15th day of each month, each payment being equal to 1/12th of the total estimated tax required to be paid for the year. [COLO. REV. STAT. Secs. 39-22-606(4)(b) and 39-22-606(5)(a.5)]

COLORADO EDITION. In the November, 2006 election, Colorado voters passed an initiative (Amendment 42) to increase the state minimum wage to $6.85 an hour, beginning January 1, 2007, and indexed for inflation in each subsequent year. The 2008 minimum wage is $7.02 an hour.

COLORADO EDITION. Colorado recently (2006) adopted a new sales tax regulation regarding computer software. Software is now considered tangible personal property and is subject to tax if it is:

• Prepackaged for repeated sale or license;
• Governed by a tear-open non-negotiable license agreement; and
• Delivered in a tangible medium (tapes, disks, CDs, cards, and comparable physical media).

Software is exempt from sales and use tax if it is provided through an application service provider, delivered by electronic software delivery, or transferred by "load and leave" software delivery. [Special Regulation SR-7, Computer Software (2006)]

CONNECTICUT EDITION. The Connecticut minimum wage increased to $7.40 an hour on January 1, 2006, and increased further to $7.65 an hour on January 1, 2007, where it remains in 2008. [CONN. GEN. STAT. Sec. 31-58(j)]

DELAWARE EDITION.S corporations doing business in Delaware must not fail to withhold tax on behalf of nonresidents shareholders, as the tax rules are very strict. A recent (2007) Delaware tax case, Stephen R. Simpson and Visions Unlimited, Inc. v. DOR, held that an S corporation was liable for tax plus penalties and interest where it failed to withhold tax on behalf of a nonresident shareholder, even though the shareholder had filed a Delaware nonresident tax return and had already paid the tax on his Delaware income from the S corporation.

DELAWARE EDITION. Under 2007 legislation, effective July 17, 2007, workers' compensation coverage is now generally mandatory for independent contractors, as well as employees, in the case of licensed contractors engaged in the construction industry, even where such independent contractors are sole proprietors or partners in a partnership. [DEL. CODE ANN. Title 19, Sec. 2311 and Title 30, Sec. 2501(1)]

DELAWARE EDITION. The Delaware minimum wage increased to $6.65 an hour on January 1, 2007 and increased further, to $7.15 an hour on January 1, 2008.

DELAWARE EDITION. The State of Delaware has recently established a "one-stop" website, the One Stop Business and Licensing Registration System, where you can register your business with the Delaware Division of Revenue, the Division of Unemployment Insurance, and the Office of Workers' Compensation, with links to the Delaware Division of Corporations to access incorporation, partnership, or LLC forms, and to reserve a legal entity or name.

DISTRICT OF COLUMBIA EDITION. The D.C. minimum wage increased to $7.00 an hour on January 1, 2006. [D.C. CODE ANN. Sec. 32-1003, and "Minimum Wage Emergency Amendment Act of 2004," November 30, 2004] In addition to the D.C. minimum wage requirements, the D.C. "Living Wage Act of 2006" requires employers who are recipients of $100,000 or more in new government contracts or government assistance (such as grants, loans, or tax increment financing) to pay a "living wage," which is $11.75 an hour from June 9, 2006 until January 1, 2008, then indexed for inflation. Subcontractors of such contractors, who receive more than $15,000 of the funds received by the contractor on government contracts, or subcontractors receiving $50,000 or more from recipients of $100,000 or more of government assistance, are also required to pay the living wage. [D.C. CODE ANN. Sec. 2-220.05]

Exemptions from the Living Wage Act are provided for employees under 22 years of age employed during a school vacation period, or enrolled as a full-time student who works less than 25 hours a week (provided that other employees are not replaced).

DISTRICT OF COLUMBIA EDITION. In a 2006 D.C. Superior Court decision, Bender, et al, v. District of Columbia, D.C. Super. Ct. (Tax Div.), the D.C. franchise (income tax) on unincorporated businesses was held to be in violation of the Congressional mandate that the D.C. government may not tax the personal income of any nonresident of the District.

However, the D.C. Court of Appeals has now overturned the Superior Court decision in Bender, holding that the D.C. unincorporated business franchise tax can be applied to a nonresident partner's share of a real estate partnership's net income, where such income is derived from operation of the unincorporated business within the District. The Court of Appeals decision is final, since the U.S. Supreme Court, on February 21, 2007, declined to review the decision of the Court of Appeals (denied certiorari).

FLORIDA EDITION. Under the Florida Constitution, as amended by voters in the November, 2007 election, the first $25,000 of taxable tangible personal property at a site where the owner transacts business is now exempted from property tax, beginning in 2008. [FLA. CONSTITUTION, Article 7, Section 3(f), as amended] This means that if separate property tax returns are filed for separate places where business is transacted, the exemption can be claimed for up to $25,000 of tangible personal property at each such place of business. [Per notice from Fla. Dept. of Revenue re Senate Bill 4D, 2/15/2008]

FLORIDA EDITION. Governor Jeb Bush has signed into law a repeal of the Florida intangibles property tax, effective January 1, 2007.

FLORIDA EDITION. Florida, whose voters enacted a minimum wage for the first time in 2005 by amending the state's constitution, has increased the state minimum wage (adjusted for inflation) to $6.67 an hour for the year 2007 and $6.79 beginning January 1, 2008.

GEORGIA EDITION. Effective in 2007, any business filing a Georgia tax return (income tax, sales tax, or other) must make the tax payments by electronic funds transfer (EFT) if the tax liability on the return is $5,000 or more ($10,000 or more in years prior to 2007). In addition, all future payments of the tax by that taxpayer must also be made by EFT, even if the amount of tax falls below the $5,000 threshold in subsequent years. [Rule 560-3-2-.26, Dec. 19, 2006]

GEORGIA EDITION. In April, 2006, Georgia enacted very tough new penalties for failing to collect sales and use tax, filing false or fraudulent sales and use tax returns, or failure to keep or furnish sales and use tax records as required. The new law makes any of such offenses a felony, punishable by fines of up to $5,000 and a year of imprisonment for a first offense. Second violations can result in fines of up to $10,000 and five years of prison time. [Per Dept. of Revenue Press Release]

GEORGIA EDITION. Under a recent enacted Georgia law, all residential and general contractors were required to be licensed by the state, beginning July 1, 2007. However, recent legislation has extended this deadline to January 1, 2008. Passage of an examination is required for licensure, except for qualified contractors who applied for exemption from the examination requirement by January 3, 2007. A newly organized State Licensing Board for Residential and General Contractors is the agency that regulates contractor licensing in Georgia. [Per notice from Georgia Secretary of State and GA. CODE Sec. 43-41-17]

GEORGIA EDITION. Effective in 2008, no deduction will be allowed under Georgia's income tax laws for wages of $600 or more paid to an undocumented worker or illegal alien. Any payment for labor services to an individual of $600 or more in a year will only be deductible if the worker is an "authorized employee," as defined by statute. This restriction will not apply to any worker who presents a valid driver's license or I.D. card issued by the Georgia Department of Driver Services. [GA. CODE ANN. Secs. 48-7-21.1 (effective January 1, 2008)]

HAWAII EDITION. Because of its low level of unemployment in recent years, and the high taxable wage base on which unemployment taxes were based ($34,000 in 2006, the highest of any state), Hawaii had built up a large surplus in its state unemployment insurance fund. Thus, in 2007, the unemployment tax rate was lowered to 1.9% from 2.4% in 2006, although the wage base increased again with inflation indexing to $35,300. However, a very major cut in the unemployment tax was made in 2008, by reducing the taxable wage base to only $13,000 and by cutting the new employer tax rate further, to 1.7%. Thus, the maximum tax per employee was reduced from $816 in 2006 to $670.70 in 2007 and to only $221 for 2008, greatly reducing the tax burden on employers.

HAWAII EDITION. The Hawaii minimum wage was increased to $6.75 an hour on January 1, 2006, and increased further to $7.25 an hour in 2007. [HAW. REV. STAT. ANN. Sec. 387-2]

HAWAII EDITION. Effective as of January 1, 2007, the general excise tax (GET) rate in the city and county of Honolulu (the island of Oahu) is increased from 4% to 4.5%. The 0.5% GET tax rate on sales made at wholesale is not changed. Honolulu businesses are now required to calculate the portion of their taxable sales that are allocable to Honolulu County, and pay the 1/2% county surcharge on such sales.

The Department of Taxation has issued guidance for county surcharge sourcing rules with regard to property management services. The rule is that property management fees are to be allocated to the county where the property in question is located, rather than attempting to determine where the services are rendered. [Hawaii Tax Information Release, 2007-1, Jan. 17, 2007]

IDAHO EDITION. The state unemployment tax rate for new employers in Idaho was reduced in 2008 to 1% of covered wages (the first $32,200 of wages per employee), which is the lowest state unemployment tax rate in the nation.

IDAHO EDITION. The Idaho Legislature has passed the governor's tax reform bill, which decreased Idaho property taxes and increased the state sales and use tax by 1%, from 5% to 6%, effective October 1, 2006.

IDAHO EDITION. Effective January 1, 2006, Idaho state law makes it unlawful for a contractor to practice unless the contractor holds a current contractor's registration card or is otherwise exempt from registration. A contractor is defined as anyone who does construction (himself or through others) or a construction manager who performs construction management services.

There is a $30 fee to register as a contractor. However, THIS IS NOT A LICENSURE LAW. There are no education, experience, or examination requirements that must be met for registration as a contractor, but applicants must submit specific information in order to be registered with the Idaho Bureau of Occupational Licenses.

ILLINOIS EDITION. Effective April 1, 2008, there is a 0.25% increase of the Regional Transportation Authority (RTA) sales tax rate in Cook County and a 0.5% increase in the RTA tax rate in the other five counties of northeastern Illinois: DuPage, Kane, Lake, McHenry, and Will Counties. In addition, the Cook County Board has announced a 1.75% increase in the general Cook County sales tax, effective November 1, 2008.

ILLINOIS EDITION. For tax years that end on December 31, 2008 or later, Illinois law requires that pass-through entities (partnerships, LLC's, and S corporations) must withhold on taxable income of nonresident owners, paying the tax over by March 15 or April 15, 2009 for the 2008 tax year, depending on the date by which the entity's income tax return is due. No such withholding is required for individual owners who are included in a composite tax return filed by the entity on behalf of its nonresident owners (although the entity still must pay tax on their behalf), or if the nonresident owners (if not individuals) provide documentation to the pass-through entity stating that they take responsibility for their tax obligations to the state. Pass-through entities classified as investment partnerships are exempted from withholding.

ILLINOIS EDITION. In 2007, overriding the governor's veto, the Illinois Legislature has adopted new withholding requirements for employers. Under the new law, for withholding tax returns due on or after January 1, 2008, any employer that was required to withhold more than $12,000 during the 12-month period ending on June 30th of the preceding calendar year will be required to make semi-weekly tax payments each week and file quarterly tax returns by the end of the first month after the end of each calendar quarter. Other employers will have to make monthly payments by the 15th of each month for the preceding month.

Under the new law, the Department of Revenue may issue rules or regulations that allow small employers who withhold $1,000 or less in state income tax during the calendar year to file a return and pay the tax by January 31 of the following year.

ILLINOIS EDITION. Partnerships, or entities taxable as partnerships, such as LLCs, are not subject to state income taxation in Illinois. However, they are generally subject to the Personal Property Replacement Tax Replacement Income Tax, at a rate of 1.5% of taxable income, with certain exceptions, such as for investment partnerships (in 2005 or later). [35 ILCS Sec. 5/201(c) and (d)]

ILLINOIS EDITION. Beginning with tax years that end on December 31, 2008 or later, partnerships, LLCs that are taxable as partnerships, and S corporations that have Illinois-source income will be required to withhold Illinois income tax on the distributive share of such income allocable to any nonresident partner, member, or shareholder. Payment of the tax is due at the time of filing of the entity's annual tax return.

ILLINOIS EDITION. The state minimum wage in Illinois, which was set at $6.50 an hour in 2006, will increase to $7.50 on July 1, 2007. A sub-minimum wage of $6.00 an hour is required for employees under the age of 18.

INDIANA EDITION. Indiana has enacted a major reform of property taxes, including permanent caps on the maximum rates of property taxes on homes (1% of assessed value), apartments and agricultural land (2%), and business property (3%), in 2010 and later, plus a number of immediate reductions in 2008 and 2009. To offset the decreased tax revenue, the state sales tax was increased from 6% to 7% as of April 8, 2008.

INDIANA EDITION. In 2007, the Indiana legislature took the business-friendly step of repealing the state's bulk sale law (Article 6 of the Uniform Commercial Code), so that purchasers of a business or the assets of a business are no longer subject to the burdensome legal requirements of complying with the bulk sale law.

INDIANA EDITION. Effective December 16, 2007, corporations are no longer required to make estimated tax payments of Indiana adjusted gross income tax if the annual tax is $2,500 or less ($1,000 before December 16, 2007). Also effective on and after that date, corporations whose quarterly estimated tax payments exceed $5,000 per payment will be required to make payments by electronic funds transfer (EFT)or by delivering in person or overnight by courier a payment by cashier's check, certified check, or money order, on or before the date the tax is due.

INDIANA EDITION. Effective since December 16, 2007, no estimated tax declaration is required of individuals if their estimated Indiana adjusted gross income tax is reasonably expected to be less than $1,000 ($400 prior to December 16, 2007).

INDIANA EDITION. Effective January 1, 2008, pass-through entities (partnerships, LLCs taxable as partnerships, and S corporations) must file composite Indiana income tax returns on behalf of all nonresident individual partners, members, or shareholders.

INDIANA EDITION. Effective January 1, 2008, large payers of Indiana sales and use tax making more than $5,000 of sales and use tax payments are required to make payment by electronic funds transfer (EFT). The previous threshold for required EFT payments was $10,000 of tax.

INDIANA EDITION. Beginning with assessments made in 2006, for property taxes first due and payable in 2007, business inventory is now generally exempted from property tax statewide, in all Indiana counties. The inventory must still be reported on the taxpayer's personal property tax return but is to be deducted on the same form for the ease of the taxpayer. [Per e-mail response to author from Dept. of Local Govt. Finance, 3-20-2006, and IND. CODE ANN. Sec. 6-1.1-12-42]

IOWA EDITION. Iowa has the lowest unemployment tax rate of any state, currently only 1% of covered wages for most new employers (in 2005 through 2008). The wage to which the tax applies is $22,800 for each employee in 2007.

IOWA EDITION. Effective since April 1, 2007, the Iowa state minimum wage has increased from the former rate of $5.15 an hour to $6.20 an hour and increased again to $7.25 on January 1, 2008. The Iowa minimum wage applies to most employers, except for most small retail and service businesses with less than $300,000 of annual gross revenues. Iowa does not have an overtime pay requirement, unlike the federal wage/hour law.

KANSAS EDITION. The Kansas franchise tax on capital is being phased out, beginning in 2007, when the tax applied only to taxable capital in excess of $1 million, rather than $100,000. The former tax rate of $1.25 per $1,000 of taxable capital is being reduced each year from 2008 through 2010 as follows, until final repeal after December 31, 2010:

• 2008 -- $.9375
• 2009 -- $.625
• 2010 -- $.3125
• 2011 -- Zero

KANSAS EDITION. Effective for purchases or leases made after June 30, 2006, Kansas exempts all business machinery and equipment from property taxes and also exempts such property brought into the state in order to expand a Kansas business. Also, "low cost" items of machinery, equipment, materials, and supplies to be used in a business, costing under $400 "when new" in 2005 and 2006 are exempt, and new legislation has increased the threshold cost of such items to $1,500 for 2007 and subsequent tax years.

KENTUCKY EDITION. After a major overhaul of its income tax laws that made all limited liability entities (LLCs, LLPs, limited partnerships, and S corporations) subject to the corporate income tax in 2005 and 2006, the Kentucky legislature has acted again in July, 2006, and has restored the previous (nontaxable) tax treatment of such pass-through entities, beginning in 2007, but a complex new Limited Liability Entity (LLE) tax, based on either gross receipts or gross profits, will now apply to all limited liability entities (including C corporations, which can claim the LLE tax as a credit against their corporate income tax liability). However, entities with less than $3 million of total gross receipts (inside and outside Kentucky) will be exempt from the LLE tax.

For details and analysis of the complex and confusing new Kentucky business tax laws, see the current edition of Starting and Operating a Business in Kentucky. (Ordering information at: www.roninsoft.com/sbzorder.htm.)

LOUISIANA EDITION. The Louisiana gift tax is repealed, effective July 1, 2008, and the inheritance tax is repealed entirely, retroactively for all deaths occurring after June 30, 2004.

LOUISIANA EDITION. In tax years 2006 and later, the Louisiana franchise tax on debt capital has begun to phase out, with only the following percentages of debt capital subject to tax each year (for taxable years starting in each such year):

• 2006 -- 86%
• 2007 -- 72%
• 2008 -- 58%
• 2009 -- 44%
• 2010 -- 30%
• 2011 -- 16%

[LA. REV. STAT. Sec. 47:603] Under additional legislation enacted in 2008, the above phase-out of the tax on debt capital will be accelerated by one year, so that the franchise tax on debt capital will be completely repealed by 2011, rather than 2012.

MAINE EDITION. The Maine minimum hourly wage was increased from $6.50 an hour to $6.75 an hour, effective as of October 1, 2006. It is scheduled to increase to $7.00 on October 1, 2007.

MAINE EDITION. The new Maine partnership law that goes into effect on July 1, 2007 will greatly increase the liability protection offered by a limited liability partnership, placing such partnerships on a par with corporations and LLCs, in terms of liability protection. Prior to that date, a limited liability partnership only protects a partner against liability for misconduct of another partner in the partnership.

MARYLAND EDITION. In 2007 legislation, Maryland has repealed the 2003 law that required that a 3% tax be withheld from payments made to nonresident contractors for certain real estate improvement contracts for $50,000 or more.

MARYLAND EDITION. Maryland has enacted sweeping new "tax reforms," effective in the 2008 taxable year. These include an increase in the corporate income tax rate from 7% to 8.25% and the addition of 3 new individual income tax brackets on top of the previous maximum bracket of 4.75%. The three new income tax bracket rates are 5%, 5.25%, and 5.5%, and kick in at taxable income levels over $150,000, $300,000, and $500,000, respectively. In subsequent legislation, for the years 2008-2010, the tax rate will be 5.5% on income in excess of $500,000 and 6.25% on income in excess of $1 million.

In addition, effective January 3, 2008, the sales and use tax rate is increased from 5% to 6% and certain computer services have become subject to sales tax, until June 30, 2013. The credit allowed to vendors for their costs of collecting and reporting sales taxes will be limited to $500 per tax return, from January 3, 2008 through June 30, 2011, under 2007 legislation.

MARYLAND EDITION. Overriding a veto by the governor, the Maryland Legislature enacted a new law in January, 2006 that requires certain employers to contribute to the state's Medicaid fund. The law only applies to employers with over 10,000 employees in the state who pay less than 8% of their total payroll for employee health care. Such employers must pay the difference between 8% of payroll and the amount they actually incur as employee health care expenses over to to the state Medicaid program, as a special tax. However, this legislation was carefully designed to apply to and punish only one company, Wal-Mart, and thus is not a concern for small businesses, unless the Legislature decides at some point to lower the 10,000 employee threshold to a much smaller number, which some political and labor leaders have urged.

In July, 2006, a federal district court held that the "Wal-Mart law" is invalid under federal law, but the state is appealing the decision to the federal Court of Appeals. Stay tuned.

MARYLAND EDITION. The Maryland minimum wage increased to $6.15 an hour on February 15, 2006, and will automatically increase to match any higher federal minimum wage level. [MD. CODE ANN. LABOR & EMPLOY. Sec. 3-413]

MASSACHUSETTS EDITION. The Massachusetts minimum wage, which has been $6.75 an hour since January 1, 2001, increased to $7.50 an hour on January 1, 2007 and will increase to $8.00 on January 1, 2008.

MASSACHUSETTS EDITION. Massachusetts imposes a room occupancy tax on room rentals for periods of 90 days or less, but the Department of Revenue has long taken the position that the tax applies to the first 90 days of a room rental, even if a room or apartment is leased for a longer period. However, the Massachusetts Appeals Court held recently that no tax applies to the first 90 days where a room is rented to someone for more than 90 consecutive days, in Lowney v. Commissioner of Revenue, Mass. App. Ct. (2006). In 2007, the Department of Revenue announced that it will not appeal this decision. [Mass. Technical Information Release, 07-2, January 26, 2007]

MASSACHUSETTS EDITION. The Massachusetts General Court (legislature), in April, 2006, enacted an innovative but controversial new universal health care insurance law that, in effect, treats health care insurance much like auto insurance, requiring all Massachusetts residents to obtain such coverage by July 1, 2007, or face loss of their state personal exemption for the 2007 tax year, or a large fine in 2008 or later years. Residents will choose from a wide range of private insurance policies at varying rates, ranging from large sums per month to free, for low-income individuals, whose insurance premium costs will be largely or entirely subsidized by the state. Individuals who fail to obtain coverage by January 1, 2008 are subject to a fine of $219.

Employers with 11 or more employees are required to either provide health insurance or offer a (federal tax code) Section 125 Plan that allows employees to purchase health care insurance with pre-tax dollars. Employers must also make a "fair and reasonable contribution" towards the cost of such employee coverage or else pay a "Fair Share Contribution" to the state of up to $295 per employee.

MICHIGAN EDITION. Michigan has repealed the use tax on a wide range of services, which was to have gone into effect on December 1, 2007. In its place, a 21.99% surcharge has been added to the Michigan Business Tax (MBT) for each taxpayer subject to the MBT, other than financial institutions, on which a 27.7% surcharge is imposed for 2008 and 23.4% in 2009 and after.

MICHIGAN EDITION. The Michigan individual income tax, which has been imposed at a flat rate of 3.9% in recent years, has been increased to 4.35%, from October 1, 2007 through September 30, 2011. Beginning October 1, 2011, it is scheduled to decrease by 0.1% each year until October 1, 2015, when it will decrease from 3.95% to 3.9% once more.

MICHIGAN EDITION. The Michigan legislature, in August of 2006, approved a repeal of the Michigan Single Business Tax ("SBT") two years earlier than had currently been scheduled. Under prior law, the SBT was to be eliminated after December 31, 2009. The new measure will repeal the SBT after December 31, 2007.

MICHIGAN EDITION. In July, 2007, Governor Granholm signed into existence two new state taxes to replace the Single Business Tax, effective January 1, 2008. These new taxes are a 4.95% tax on business net income (with various adjustments) and a 0.8% tax on modified gross receipts, which is total gross receipts less purchases from other firms.

MICHIGAN EDITION. Effective for tax year 2005 and subsequently, the City of Detroit is requiring that nonresident taxpayers who allocate less than 100% of their income to Detroit (for Detroit city income tax purposes) to provide documentation from their employer to verify Lines 1 and 2 of Schedule N and attach that documentation to the return. Nonresidents are instructed to attach a work log, if applicable. If no documentation is provided, the tax return will be returned to the taxpayer requesting the missing documentation.

MICHIGAN EDITION. The Michigan minimum wage was increased to $6.95 an hour on October 1, 2006, with further increases to $7.15 on July 1, 2007 and to $7.40 an hour on July 1, 2008.

MINNESOTA EDITION. Under 2008 Omnibus Tax Legislation enacted in Minnesota, employers with 100 or more employees must submit their Minnesota W-2's for 2008 electronically. The 100-employee threshold will be decreased to 50 employees in 2009 and 25 in 2010 and following tax years. In addition, the new law requires construction contractors to withhold tax at the rate of 2% on payments to individuals who perform contract work for them, beginning January 1, 2009.

MINNESOTA EDITION. A new 0.15% sales tax is imposed in Hennepin County (including Minneapolis), effective January 1, 2007. The new tax is to be used to finance the new Minnesota Twins Stadium, and increases the total tax rate in the county to 6.65% (7.15% in Minneapolis).

MINNESOTA EDITION. Effective in 2005 and thereafter, wages or salary paid to a corporate officer who owns 25% or more of the stock of the corporation are exempt from Minnesota unemployment tax, unless the officer voluntarily chooses to have his or her wages be subject to the tax. A similar exemption applies to an LLC member who owns 25% or more of the LLC. [MINN. STAT. Sec. 268.035, Subd. 20, par. (28)]

PLANNING POINT:

---

Although officers of a corporation who own 25% or more of the stock are now exempt from Minnesota unemployment tax, they will not be exempt from federal unemployment tax (FUTA). Since the FUTA tax rate is 6.2% on the first $7,000 of covered wages, and the usual 5.4% tax credit that is allowed where state unemployment tax is paid will not apply, the payment of the full FUTA rate may or may not be less than the sum of the Minnesota unemployment tax that would be paid on the officer's wages that are subject to the Minnesota tax (on up to $24,000 of wages in 2006), plus the 0.8% (net) FUTA rate that would be paid if the officer were subject to the Minnesota unemployment tax.

Thus, in some cases, particularly where the officer's salary is relatively low and the Minnesota tax rate on his or her wages is also fairly low, it may make sense for an officer who is exempt from Minnesota unemployment tax to voluntarily elect to be subject to the state tax.

(An LLC member would generally not be subject to FUTA, in which case it would be best not to elect to be subject to the state unemployment tax.)

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MISSISSIPPI EDITION. Under 2008 tax legislation, sales of software or software services transmitted by the Internet to a destination outside Mississippi, where the first use of such software or software services by the purchaser occurs outside of the state, are exempt from Mississippi sales tax.

MISSISSIPPI EDITION. Certain large businesses whose monthly sales tax or withholding of employees' Mississippi state income tax is $20,000 per month or more are required to make an estimated sales or withholding tax payment for the month of June, by June 25th, equal to 75% of the estimated sales tax or employee withholding tax for the month. In 2008, for the payment due June 25, 2008, the $20,000 threshold amount will be increased to $50,000 per month, relieving some large employers of this prepayment requirement.

MISSISSIPPI EDITION. Effective January, 1 2005, the new Uniform Partnership Act was enacted in Mississippi. The revised law, among other changes, provides significantly increased liability protection for partners in limited liability partnerships (LLPs). [MISS. LAWS Sec. 79-13-306]

MISSOURI EDITION. In the November, 2006 election, Missouri voters passed an initiative (Proposition B) to increase the state minimum wage to $6.50 an hour, beginning January 1, 2007, and indexed for inflation in each subsequent year. The new minimum wage law applies to Missouri retail or service businesses whose annual gross sales are $500,000 or more.

MISSOURI EDITION. In 2006, the Missouri Department of Revenue amended its regulations on successor liability in connection with the purchase of a business or its assets, to reflect a clarification of the law resulting from a state Supreme Court opinion. It clarifies that any purchaser of substantially all of a business or stock of goods of a business must now withhold and remit to the Department sufficient purchase money to pay the seller's tax liability.

MONTANA EDITION. In the November, 2006 election, Montana voters passed an initiative (Initiative 151) to increase the state minimum wage to $6.15 an hour, beginning January 1, 2007, and indexed for inflation in each subsequent year.

MONTANA EDITION. While workers' compensation laws in most states apply only to employees, the passage of SB 108 by the 2005 legislature changed the way Montana views independent contractors, for purposes of workers' compensation coverage. While your business still generally is not required to provide coverage for independent contractors it hires, you need to be aware of these changes in the law. SB108 now requires that all independent contractors must either:

• Have an exemption certificate obtained through the Department of Labor and Industry; or
• Purchase workers’ compensation insurance coverage on themselves.

NEBRASKA EDITION. Legislation adopted in 2005 increased the taxable wage base under the Nebraska unemployment tax law from $7,000 in previous years to $8,000 in 2006 and to $9,000 in 2007 and later years and also provided for an emergency surcharge of up to 1% of taxable wages in 2006-2009 if the state's reserves for unemployment benefits fall below a specified level as of September 30th of any of those years. The legislation also lowered the general new employer tax rate from 3.5% to the lower of 2.5% or the state's average unemployment tax rate, and raised the new employer rate for construction employers to the highest rate applicable for that year (category 20). For 2007, the new employer tax rate is generally 1.6%, but is 5.4% for construction industry employers.

NEBRASKA EDITION. Nebraska now requires withholding on payments of directors' fees to nonresident corporate directors. The percentage of the annual payments to a nonresident director that is taxable in Nebraska and subject to withholding by the corporation is the total of such income multiplied by a fraction, in which the numerator is the number of directors' meetings attended in person in Nebraska or by phone while the director is physically present in Nebraska and the denominator of the fraction is the total number of board meetings of the corporation that the director attended either in person or telephonically during the year. [Nebraska Revenue Ruling, 21-07-1, March 6, 2007]

NEVADA EDITION. The Nevada Modified Business Tax on employers was temporarily reduced from 0.65% to 0.63% on July 1, 2005 and was scheduled to revert back to 0.65% on July 1, 2007. However, new legislation in 2007 has made the 0.63% tax rate permanent.

NEVADA EDITION. In the November, 2006 election, Nevada voters approved an amendment to the Nevada Constitution (Nevada Question 6) which will require employers to pay at least $6.15 per hour worked if the employer does not provide health benefits. The employer can still pay the federal minimum wage of $5.15 if health benefits are provided. Rates will be adjusted by the amount of increase in the federal minimum wage over $5.15 per hour, or, if greater, by the cumulative increase in the cost of living measured by the Consumer Price Index (CPI), with no CPI adjustment for any one-year period greater than 3%.

NEVADA EDITION. Beginning July 1, 2006, A general partnership may, if desired, file a Statement of Partnership Authority with the Nevada Secretary of State, together with payment of the applicable recording fee. The Statement of Partnership Authority may list the names of the partners authorized to execute an instrument transferring real property held in the name of the partnership. It may also state the authority, or limitations on the authority, of some or all of the partners to enter into other transactions on behalf of the partnership and any other specified matters. [NEV. REV. STAT. Sec. 87.4318]

NEVADA EDITION. Until recently, Nevada's LLP law only provided liability protection for partners in an LLP for liabilities arising out of the malpractice, misconduct, errors or omissions of another partner, but did not protect the partners from trade debts or other liabilities. However, the law was changed, effective July 1, 2006, to expand the liability protection to such other types of liability. [NEV. REV. STAT. Sec. 87.433]

NEW HAMPSHIRE EDITION. On April 26, 2007, the New Hampshire legislature enacted a civil unions law, giving gay couples the right to enter into civil unions and be granted most of the rights of married couples under state law, including various New Hampshire tax laws. Governor John Lynch had already indicated he would sign the bill into law, if enacted by the legislature.

NEW HAMPSHIRE EDITION. Under recent legislation, the New Hampshire unemployment tax rate can be reduced, for all new employers and for experience-rated employers with normal rates of 2.7% or less, if the state unemployment fund reserves exceed certain levels. The rate reduction can be either 0.5%, 1%, or 1.5%, if the state unemployment fund reserves exceed specified levels, beginning at $225 million. Thus, in 2006, the rate for new employers was reduced by 1% in the first quarter, to 1.7%, and by 0.5% in the second and third quarters, to 2.2%, and by 1% again, to 1.7%, for the fourth quarter of 2006 and for all of 2007.

NEW HAMPSHIRE EDITION. Since July 1, 2006, new state securities legislation in New Hampshire requires all business entity registrations (incorporation, formation of LLCs, limited partnerships, or LLPs, or registration of such foreign-formed entities) to file an addendum, Form SRA, stating that they are in compliance with New Hampshire's securities laws, for any securities issued by the entity in New Hampshire. An additional filing fee of $50 must accompany the addendum.

NEW JERSEY EDITION. New legislation enacted in April, 2008 has extended the scope of the New Jersey Temporary Disability Insurance (TDI) law to include paid family leave, which is to be financed by all employees as a wage deduction (i.e., additional withholding tax). Initially, in 2008, the tax rate is to be 0.1% of an employee's wages, up to the amount of the Social Security wage base (which is $102,000 in 2008). An employee will be eligible to take such leave to care for a serious health condition of a child, spouse, domestic partner, or parent, or when necessary to care for a newborn or newly adopted child during the first year after birth or adoption. Up to 12 weeks of paid family leave is allowed per year for each worker. The new family disability leave provisions are effective after June 30, 2008.

NEW JERSEY EDITION. Effective for payments made on or after January 1, 2007, business are required to withhold New Jersey Gross Income Tax at the rate of 7% from payments made to unincorporated contractors. "Contractors" are firms or persons who do construction or repair work on real estate generally, though payments for certain professional services are excluded from the withholding requirements. Withholding is not required if the person making the payment has obtained from the person receiving the payment proof of its registration with the Division of Revenue, Department of Treasury. [N.J. REV. STAT. Sec 54A:7-1]

NEW JERSEY EDITION. On December 21, 2006, Governor Corzine signed into law a New Jersey "civil unions" act, which confers marriage-like benefits (including tax filing status and other benefits) for same-sex couples who have entered into civil unions, making New Jersey the fifth state to do so (only Massachusetts allows gay marriage under state law at present).

NEW JERSEY EDITION. After undergoing a serious budgetary crisis and brief state government shutdown in the summer of 2006, the New Jersey legislature finally agreed to Governor Corzine's urging that various state taxes be increased immediately. The new legislation, in attempting to balance a severe state budget deficit, added or increased the following taxes:

• Increased the sales tax rate from 6% to 7%, effective July 15, 2006;
• Imposed a new surtax on the existing corporate income tax, equal to 4% of the regular tax liability, after taking into account any tax credits (for privilege periods ending after July 1, 2006 and before July 1, 2009);
• Increased the minimum corporate income tax (previously $500) for any corporation with over $100,000 in gross receipts in 2006 or later years, to either $750, $1,000, $1,500, or $2,000, depending on the amount of a corporation's gross receipts;
• Made it clear that pre-written ("canned") computer software is generally taxable (for sales and use tax purposes), unless it is electronically delivered and used directly and exclusively in the purchaser's business, but also specifies that no exemption is allowed for delivery of pre-written software by a "load and leave" delivery method;
• Increased the rental car daily surcharge (tax) from $2 to $5 per day; and
• Imposed a new tax of 1% on the conveyance of any commercial property for more than $1 million of consideration.

NEW JERSEY EDITION. The New Jersey minimum wage increased from $6.15 an hour to $7.15 an hour on October 1, 2006. [N.J. STAT. ANN. Sec. 34:11-56a4]

NEW JERSEY EDITION. Effective January 1, 2007, New Jersey requires any business operating in New Jersey that pays an unincorporated contractor in the building trades for services to withhold tax as if the person were an employee, rather than an independent contractor.

NEW MEXICO EDITION. The City of Santa Fe has adopted a minimum wage ordinance that applies to all businesses with 25 or more employees that are licensed to do business in that city. The ordinance has now been upheld by the New Mexico courts, after being challenged by a business group.

The Santa Fe minimum wage was set at $8.50 an hour on January 1, 2004, increased to $9.50 on January 1, 2006, and is scheduled to increase again to $10.50 on January 1, 2008. It will then increase in line with inflation, beginning in 2009. While the city's minimum wage does not apply to businesses with fewer than 25 employees, as a practical matter, it is already difficult if not impossible for small businesses to hire workers for less than the city minimum wage, when all larger employers in the area are paying that rate or more. [CITY OF SANTA FE ORDINANCE No. 2003-8 (amending SFCC Sec. 28-1.2)]

NEW YORK EDITION. Until recently, New York City taxpayers who were subject to both the city Unincorporated Business Tax (UBT) and the city personal income were allowed to take a tax credit on their personal (city) income tax return for 15% to 65% of the UBT they paid, depending on their income level.

Effective as of September 2, 2007, new legislation increases the minimum percentage credit allowed from 15% to 23% and, for taxpayers with incomes of $42,000 or less, increases the maximum allowable credit from 65% to a full 100% credit.

NEW YORK EDITION. In a move intended to make New York state more tax-friendly towards businesses, the legislature in 2007 has enacted a cut in the general corporate franchise tax rate, effective for tax years beginning January 1, 2007 or later, reducing the top rate of 7.5% to a new maximum rate of 7.1%. The new legislation also reduces two tax rates relevant to manufacturers: the overall tax rate on manufacturing income, from 7.5% to 6.5%; and the alternative minimum tax, which tends to disproportionately affect manufacturers, from 2.5% to 1.5%.

NEW YORK EDITION. In 2005, New York was the only "credit reduction state" in which employers did not receive a full 5.4% credit against the federal unemployment tax (FUTA) rate of 6.2%, due to the fact that New York could not repay the balance of a federal loan taken out to meet its state unemployment compensation obligations. Thus, only a 4.8% FUTA credit was allowable for 2005, for employers in New York, so that New York employers who paid their state unemployment taxes in full and in a timely manner had to pay a net FUTA tax rate of 1.4%, instead of the 0.8% paid by employers in the rest of the states. The credit reduction was also in effect for New York in 2004.

However, due to the improving financial condition of New York's unemployment compensation fund, the full 5.4% FUTA credit will be available to New York employers in 2006 and 2007.

NEW YORK EDITION. The County of Suffolk has adopted a "living wage" ordinance that requires that employers of 10 or more employees that have contracts with the county to pay a minimum wage that is indexed for inflation each July 1. As of July 1, 2007, the county living wage is $10.40 per hour for employers that provide health care coverage to employees and $11.84 for those that do not. [LAWS OF SUFFOLK COUNTY, Sec. 347-3]

NEW YORK EDITION. The New York minimum wage increased to $6.75 an hour on January 1, 2006 and to $7.15 an hour on January 1, 2007. [N.Y. LABOR LAW, Art. 19, Sec. 652]

NORTH CAROLINA EDITION. Effective April 1, 2008, the "combined general rate" of sales and use tax in North Carolina increased from 6.75% to 7%.

NORTH CAROLINA EDITION. The North Carolina minimum wage increased to $6.15 an hour, effective January 1, 2007.

NORTH CAROLINA EDITION. North Carolina's top 2006 individual income tax rate of 8.25% decreased to 8% in 2007 and decreases further to 7.75% in 2008.

NORTH CAROLINA EDITION. North Carolina's bulk sale law was repealed in 2005. Accordingly, this is one less bit of red tape you need to be concerned with, when acquiring assets of an existing business in North Carolina.

NORTH CAROLINA EDITION. On December 1, 2006, the statewide North Carolina sales tax rate decreased from 4.5% to 4.25%. On July 1, 2007, the tax rate was scheduled to decrease further to 4%, but new legislation in 2007 has extended the 4.25% sales tax rate until October 1, 2008, at which time the rate will INCREASE to 4.5%, followed by a further increase to 4.75% on October 1, 2009. [N.C. GEN. STAT. Sec. 105-164.4(a)]

NORTH CAROLINA EDITION. LLCs are not generally subject to the North Carolina franchise tax, unlike corporations. However, under 2006 legislation, LLCs that elect to be taxed as corporations become subject to the franchise tax, for tax years beginning in 2007 or later. Such LLCs will receive a $180 tax credit, which is the difference between the $20 annual report fee for a corporation and the $200 annual report fee for LLCs that do not elect to be treated as corporations.

NORTH DAKOTA EDITION. North Dakota until recently imposed a one-time license fee or tax at the time of incorporation, based on a corporation's authorized capital stock, and additional fees subsequently if the number of authorized shares were increased. However, this license fee has been repealed, for corporations formed on or after July 1, 2007.

NORTH DAKOTA EDITION. Under new (2007) legislation, North Dakota will allow an income tax credit for 10% of real estate taxes paid by homeowners, ranchers, and commercial businesses. The new tax credit will be limited to $1,000 each year for married couples filing jointly, or for farmers, ranchers, and businesses, and will be limted to $500 for individual income tax filers.

NORTH DAKOTA EDITION. The maximum North Dakota corporation income tax rate, on taxable income in excess of $30,000, was 7% in 2006, but will decrease to 6.5% for taxable years beginning after December 31, 2006.

NORTH DAKOTA EDITION. In 2005, North Dakota enacted a new tax law that requires all pass-through entities, including partnerships, S corporations, and limited liability companies that are taxable as partnerships, to withhold state income tax at the rate of 5.54% of the year-end distributive share of the entity's North Dakota-sourced income with respect to any owners that are not North Dakota residents. No withholding is required for a nonresident whose distributive share of taxable income for the taxable year is less than $1,000.

The new law applies to the taxable years of pass-through entities that begin in 2006 or later.

NORTH DAKOTA EDITION. Effective July 1, 2006, the minimum workers' compensation premium for North Dakota employers has increased from $125 to $250. Nearly 1/3 of the state's employers pay only the minimum premium. Despite the increase, North Dakota has the nation's lowest workers' compensation insurance costs to employers.

NORTH DAKOTA EDITION. Effective July 24, 2007, the North Dakota minimum wage, which is tied to the federal minimum wage, also increased to $5.85 an hour, and will increase along with the federal minimum wage to $6.55 an hour on July 24, 2008 and to $7.25 an hour on July 24, 2009.

OHIO EDITION. Ohio law now requires that employers, in addition to reporting newly hired employees, must also report independent contractors to whom they will pay $2,500 or more for services renderend during the year, with certain exceptions, such as for services of professionals.

OHIO EDITION. Ohio retailers whose delivery sales in calendar year 2005 totaled less than $30 million were given a break in 2007 from a provision of the Streamlined Sales Tax Agreement that would have required them to shift in 2007 to a destination-based means of calculating sales tax. The Department of Taxation announced early in 2007 that those retailers can continue to calculate sales tax using origin-based sourcing, or location of the sale, which is normally their store location. However, most businesses will be required to use destination-based sourcing to determine which local tax rates apply to a sale, beginning in 2008.

In a further development in the summer of 2007, the Ohio legislature has enacted a small business provision that may permanently exempt businesses with annual delivery sales in Ohio of less than $500,000 from destination-based sourcing, but this may jeopardize Ohio's attempt to harmonize its sales tax laws with the Streamlined Sales and Use Tax Agreement (SSUTA), which was to go into effect in Ohio in 2008. These new sourcing rules are effective June 30, 2007. It remains to be seen whether the small business exception will be acceptable under SSUTA and whether Ohio will be able to become a fully participating member of SSUTA on January 1, 2008.

OHIO EDITION. In the November, 2006 election, Ohio voters passed an initiative (Ohio Issue 2) to increase the state minimum wage to $6.85 an hour, beginning January 1, 2007, and indexed for inflation in each subsequent year.

OHIO EDITION. The Ohio Legislature has adopted, effective since July 1, 2005, a new Commercial Activities Tax (CAT) that will apply to all but very small businesses operating in Ohio. However, as part of a major overhaul of Ohio's tax laws, the corporate franchise (income) tax is being phased out over 5 years, as the CAT is phased in, and individual tax rates will gradually be reduced by 21% over 5 years, beginning in 2005, from the previous maximum rate of 7.5% to 5.925% by 2009. In addition, the personal property tax on tangible personal property will be phased out over 4 years for existing property, and is immediately eliminated for new manufacturing machinery and equipment purchased in 2005 or later.

OHIO EDITION. Effective July 1, 2007, the discount allowed to businesses that collect sales or use tax and pay the tax on a timely basis has been reduced from 0.90% of the tax collected to 0.75%. Vendors are allowed to keep this "discount" portion of the sales tax they collect to help defray their administrative costs of collecting the sales and use taxes and filing returns. No discount is allowed if the vendor uses a Certified Service Provider as an intermediary for sales and use tax compliance, if such Certified Service Provider receives a discount allowance on tax collections on behalf of the vendor.

OKLAHOMA EDITION. Effective November 1, 2007, a new Oklahoma law requires businesses that retain the services of independent contractors to withhold state income tax at the maximum tax bracket rate, unless the contractor provides documentation that he or she is authorized to work in the United States. This is intended to be a means of collecting state income tax from illegal immigrant laborers who might not voluntarily report such income. Tax is to be withheld when payments exceed the minimum amount ($600 at present) that requires a federal Form 1099-MISC to be filed by a payor. [68 O.S. Sec. 2385.32]

OKLAHOMA EDITION. Under recent (June, 2006 and May, 2007) tax legislation, reductions in the maximum Oklahoma individual income tax rate will go into effect over a period of several years, gradually reducing the top rate from 6.25% in 2006 to 5.65% in 2007, 5.5% in 2008, and to 5.25% by 2009.

OKLAHOMA EDITION. As of June 25, 2006, Oklahoma provides a $1,000 income tax exemption for any eligible employer that utilizes the Safety Pays OSHA Consultation Service provided by the Oklahoma Department of Labor. [OKLA. ADMIN. Code Sec. 710:50-15-33 (New)]

OKLAHOMA EDITION. Effective July 1, 2006, Oklahoma reduced the rate of income tax withholding on royalty payments made to nonresidents to 5% of such payments, down from the 6.75% rate that previously applied to such payments.

OREGON EDITION. The Oregon minimum wage is adjusted each year for inflation, and increased to $7.50 for 2006 and again to $7.80 an hour for 2007. [OREGON REV. STAT. Sec. 653.025]

OREGON EDITION. For tax years beginning on or after January 1, 2006, partnerships are required to withhold Oregon income tax with respect to the income of any nonresident partner that has no other Oregon-source income, unless the nonresident partner elects to join in the filing of a composite return for nonresident partners of that partnership. The withheld tax must be paid in quarterly estimated payments Form 40-ESV for each individual partner, or Form 20-V for partners who will file corporate returns. The tax must be withheld at the 9% rate for individual partners or a 6.6% rate for corporate partners.

OREGON EDITION. Beginning in 2008, Oregon state law will prohibit employment discrimination that is based on sexual orientation. A number of cities in Oregon already had banned such discrimination. [S.B. 2, enacted in 2007]

OREGON EDITION. Also beginning in 2008, Oregon will require withholding of state income tax on most sales of Oregon real estate interests by nonresident individuals or corporations that are not doing business in the state and have no offices in the state.

PENNSYLVANIA EDITION. On January 1, 2007, the Pennsylvania minimum wage increased to $6.25 an hour ($5.65 for small employers with 10 or fewer employees). On July 1, 2007, the state minimum wage will increase to $7.15 an hour ($6.25 for small employers). Beginning July 1, 2008, small employers will also be required to pay a minimum of $7.15 an hour.

PENNSYLVANIA EDITION. Beginning in 2007, the Pennsylvania corporate franchise tax/capital stock tax exemption allowable against the "tax base" is increased to $150,000 (formerly $125,000).

RHODE ISLAND EDITION. Beginning in 2006, individual Rhode Island taxpayers are given the choice of paying an alternative flat tax, instead of the regular Rhode Island income tax. The alternative tax (flat tax) will be computed at the following tax rates:

• 8% for 2006
• 7.5% for 2007
• 7% for 2008
• 6.5% for 2009
• 6% for 2010
• 5.5% for 2011 and subsequent tax years.

If an individual chooses to pay the alternative flat tax, no tax credits will be allowed except credits for tax payments or withholding and the tax credit for taxes paid to another state.

RHODE ISLAND EDITION. On March 1, 2006, the Rhode Island minimum wage increased to $7.10 an hour. It increased further to $7.40 an hour on January 1, 2007.

RHODE ISLAND EDITION. Effective as of January 1, 2007, Rhode Island has adopted the Streamlined Sales and Use Tax Agreement (SSUTA). Fifteen states are now full members of the SSUTA project, as of January 1, 2007.

RHODE ISLAND EDITION. Also effective as of January 1, 2007, sales and use tax applies to pre-written computer software, which is now defined by law as "tangible personal property" and thus taxable. [R. I. GEN. LAWS Sec. 44-18-16]

SOUTH CAROLINA EDITION. The South Carolina sales and use tax rate increased from 5% to 6% on June 1, 2007, but the rate increase does not apply to unprepared food purchased with food stamps, which remains subject to a reduced tax rate of 3% and will be tax-exempt, beginning November 1, 2007.

SOUTH CAROLINA EDITION. To encourage creation of small businesses in the state, South Carolina has enacted a reduction in the normal 7% maximum individual income tax rate on active business income received from a pass-through entity (a sole proprietorship, partnership, S corporation or a limited liability company). The maximum South Carolina tax rate for individuals on such business income is reduced 1/2% a year in 2006, 2007, and 2008, to 6 1/2% in 2006, 6% in 2007, and 5 1/2% in 2008, and is eventually reduced to 5% after 2008. This tax break does not apply to C corporations or LLCs that are taxed as C corporations. For more details, see the current edition of Starting and Operating a Business in South Carolina. (Ordering information at: www.roninsoft.com/sbzorder.htm.)

SOUTH DAKOTA EDITION. The South Dakota minimum wage, which is tied to the federal minimum wage, increased in step with the increase in the federal minimum wage, to $5.85 an hour on July 24, 2007, and will increase again when the federal wage increases to $6.55 an hour on July 24, 2008, and to $7.25 on July 24, 2009.

TENNESSEE EDITION. Effective January 1, 2006, Tennessee has enacted the Revised Limited Liability Company Act, for LLCs established after that date. The existing LLC law remains in effect and applies to LLCs that are formed before January 1, 2006. LLCs that were formed under the pre-2006 LLC law may elect to be governed by the revised LLC law. To do so, they must amend their articles of organization. [Laws 2005, S421, effective January 1, 2006.]

The Revised Limited Liability Company Act makes a number of provisions unwaivable, by prohibiting the LLC documents from varying or eliminating any of the following provisions:

• Notice requirements;
• The potential for personal liability;
• The duty of loyalty by members, or the obligation of good faith; or
• Any rights of any person under the Revised Limited Liability Company Act, other than the rights of a manager, director, officer, employee, agent, member, and financial holder.

The new LLC law makes a number of other significant changes, including the following:

• It expands present law to allow any entity to convert to a domestic LLC or vice versa. Under the existing law, only a domestic general or limited partnership may be converted to an LLC, and no provision existed for converting an LLC to another type of entity.
• It provides that an operating agreement need not be in writing unless the articles of organization or a written operating agreement specifically requires otherwise.
• It abolishes the use of "governors" or "board of governors" who can manage an LLC. Instead, an LLC can now be set up so that it is member-managed, manager-managed, or director-managed.
• It creates a new concept: The "family LLC," defined as an LLC in which two or more members of the same family hold, in the aggregate, at least 50% of the financial rights in the LLC. The new law prohibits a member of a family LLC from terminating the membership interest in such family LLC. If a member of a family LLC attempts to transfer the member's interest or financial rights, the transfer will be null and void.
• It allows a single-member LLCs to continue in existence following the death or disability of the single member.

TENNESSEE EDITION. Effective June 27, 2006, sales of computer software between affiliated companies (with 100% common ownership), where the software is developed by one of the affiliated companies, are exempted from Tennessee sales and use taxes. Repairs of such internally developed software are also exempted, if the repairs are done by one of the affiliated companies.

TEXAS EDITION. Under new legislation passed by the Texas Legislature in 2006, the state franchise tax will soon be expanded to cover limited partnerships, limited liability partnerships, and other limited liability business entities (but not sole proprietorships and general partnerships), effective January 1, 2008, for reports originally due after December 31, 2007.

Thus, the expanded tax will apply to the tax year 2007, and some fiscal year businesses may become subject to the new franchise tax as early as June, 2006. The new legislation, which was signed into law by Governor Perry, also makes significant changes in the way the franchise tax is computed and will lower the tax rate, generally. Small businesses will be exempted. That is, the franchise tax will not apply to taxable entities whose franchise tax, as computed, is less than $1,000 or whose total gross receipts are less than $300,000. Those exempted firms will still have to file returns, showing no tax is due.

Texas Comptroller Strayhorn estimates that the new version of the franchise tax will require some 200,000 (unincorporated) businesses that were not previously taxable to file franchise tax returns and, in many cases, pay franchise taxes, and that total franchise taxes collected will increase by $6 billion.

Instead of the current, highly complex manner of computing the franchise tax, a different and somewhat simpler method will be used. For an explanation and more details of this revolutionary change in the Texas business tax laws, see the current edition of Starting and Operating a Business in Texas. (Ordering information at: www.roninsoft.com/sbzorder.htm.)

TEXAS EDITION. The new Texas franchise tax law has already been amended in 2007 in a number of ways, most of which will reduce the tax burden on small businesses. These changes include:

• Calculation of the tax for taxable entities with total revenue between $300,000 and $900,000 will be modified by applying a sliding discount scale ranging from 80% for taxable entities with total revenue of less than $400,000 to a 20% discount for taxable entities with total revenue greater than $700,000 but less than $900,000. Those taxable entities that have total revenue of less than $300,000 will owe no tax;
• Businesses with total revenue of less than $10 million will be able to use an alternative method of calculating the franchise tax, by simply multiplying their apportioned total revenue by 0.575%; and
• A small employer (as defined) that computes its tax based on gross revenue minus compensation will be allowed an additional compensation deduction for initiating health care coverage for employees during the first and second years of provided coverage. The extra deduction will be 50% of the employer's cost for the first year and will be 25% for the second year.

Each of the above law changes is effective as of January 1, 2008

UTAH EDITION. The Utah research tax credit of 7% has been modified and reduced to 5% of qualified research expenses for 2008. However, it will increase to 6.3% of such expenses in 2009 and 9.2% thereafter.

UTAH EDITION. Effective July 1, 2007, retail establishments (such as restaurants, taverns, and clubs) licensed by the Department of Alcoholic Beverage Control (DABC) to resell liquor, wine and heavy beer can purchase liquor, wine and heavy beer exempt from sales tax using the resale exemption on Form TC-721, Exemption Certificate. When reselling liquor, wine and heavy beer, the seller must collect sales tax at the tax rate in effect for the business outlet location. The sales price is also subject to the 1 percent restaurant tax when sold by business entities located in jurisdictions that have adopted the restaurant tax. The seller must separately state the tax on the sales receipt given to the purchaser.

Retail establishments that have a liquor, wine or heavy beer inventory on June 30, 2007 will have previously paid sales tax on the inventory. To obtain credit for the previously paid sales tax, the seller should take an adjustment on line 6 of the sales tax return, Form TC-61, for the period ending June 30, 2007. This adjustment should be subtracted from line 5.

UTAH EDITION. Effective January 1, 2009, the Utah general sales tax rate (state) is increased from 4.65% to 4.7%. The state will petition to once again become an associate member of the Streamlined Sales Tax Agreement, although for the time being sourcing of sales will be based on the location of the seller for sales of tangible personal property or items transferred electronically, except in the case of various types of vehicles, mobile homes, leased property, and telecommunications services.

UTAH EDITION. In March, 2007, new tax legislation, effective in 2007, reduced the tax rate of the new flat tax on individuals from 5.35% to 5% and the state sales tax from 4.75% to 4.65%. In 2007, each Utah taxpayer was able to either choose to pay tax under the old graduated tax rate system, at rates up to 6.98% (with numerous deductions), or pay the new flat tax, with no deductions and few credits. Beginning in 2008, further legislation has abolished the old graduated rate tax system so that only the 5% flat rate tax system will apply in 2008 and going forward. Beginning in 2008, Utah taxable income will begin with federal adjusted gross income, rather than federal taxable income, and most deductions (including the deduction for 1/2 of the federal tax liability) are no longer allowed.

UTAH EDITION. In 2007, new legislation further reduced the state portion of the sales tax on food and certain food products from 2.75% to 1.75%, effective January 1, 2008.

UTAH EDITION. In September, 2006, Governor Huntsman signed into law a new flat-rate state individual income tax. Utah taxpayers are now able (for 2007 only) to choose between filing under the old tax system, with numerous deductions but a higher maximum tax bracket of 6.98%, or the new flat tax, which will apply at a single rate of 5.35%. Recent Utah legislation also reduced the state portion of the sales tax on food and certain food products from the general sales tax rate of 4.75% to 2.75%. Both of these enactments are effective in 2007.

UTAH EDITION. In October, 2006, the unemployment rate in Utah dipped to an almost microscopic 2.5%, the only time in the last 10 years the Utah rate of unemployment has ever gotten below 3%, and the lowest unemployment rate ever recorded in Utah.

UTAH EDITION. Utah has adopted the Streamlined Sales and Use Tax Agreement (SSUTA), under which the sourcing rules for sales tax transactions were to be changed to make sales taxable at the point of delivery. (Sourcing rules determine which tax rate is to apply, the rate where the sale occurred, or the tax rate where the delivery is made to the purchaser.) Under the SSUTA changes, delivery charges were also to be made taxable.

However, 2005 legislation delayed the change in the sourcing rules until July 1, 2006. Then, on March 17, 2006, new legislation was signed by the governor that repealed various SSUTA provisions, including the changes in the sourcing rules. Under the point of delivery provisions of SSUTA, sellers were required to collect sales and use tax based on the point of delivery for each customer. Thus, the old rules for sourcing a sales tax transaction, based on the place of business where the sales occur, rather than the destination of the item, will continue to apply for the foreseeable future. The SSUTA provisions making delivery charges subject to sales tax were also repealed, so that delivery charges (or an installation charge) are now not subject to sales tax, if separately stated.

UTAH EDITION. Under new limited liability company legislation enacted May 1, 2006, Utah law now allows for an LLC to provide for "series LLCs" in its operating agreement, which can be separate, designated divisions of the LLC that will each be treated as a separate LLC for liability purposes, thus "walling off" losses from the bankruptcy of one such business from the other business segments ("series") of the LLC.

VERMONT EDITION. Beginning January 1, 2007, clothing and footwear are not subject to Vermont sales or use tax regardless of price (formerly, only clothing items costing under $110 were exempt).

VERMONT EDITION. In 2006, Vermont enacted a universal (or almost universal) health care plan. Under this plan, the state will provide a new voluntary, standardized health plan -- Catamount Health -- for uninsured residents of Vermont. Participants in the plan will pay low premiums, subsidized in large part by the state for low-income individuals with incomes below 300% of the federal poverty level, and all enrollees will incur some costs, such as $10 for office visits or 20% co-payment for medical services, up to certain caps. Provision is also made for subsidizing employees who participate in their employer's health insurance plan, rather than in the state's Catamount Health plan.

Under the new law, employers are not required to provide health coverage for their employees, but employers with more than 8 employees who do not provide health insurance coverage will be required to help fund Catamount Health by paying a dollar a day ($365 a year) for each of their uninsured workers. Employers may exempt up to 8 employees from coverage without paying the daily fee for them in fiscal years 2007 and 2007, 6 employees in fiscal 2009, and 4 employees in fiscal year 2010.

The Catamount Health plan goes into effect on October 1, 2007, but employers required to contribute for uninsured employees will owe contributions beginning on April 1, 2007 (first payments due at the end of that quarter, ending June 30th, 2007).

VERMONT EDITION. The Vermont minimum wage increased to $7.25 an hour on January 1, 2006, and will increase each subsequent January by the lesser of 5% or the increase in the Consumer Price Index, CPI-U, U.S. City average. The 2007 rate has been set at $7.53 an hour. The Vermont minimum wage law applies to any employer of two or more employees. [VT. STAT. ANN., Tit. 21, Secs. 382 and 384]

VERMONT EDITION. Effective as of January 1, 2007, Vermont has adopted the Streamlined Sales and Use Tax Agreement (SSUTA). In doing so, Vermont implemented a number of changes in its sales and use tax laws, including such items as treatment of delivery charges, which are now taxable, even if separately stated, if the item being sold is taxable. "Canned" computer software is now taxable even if it is delivered electronically, by download or otherwise.

VIRGINIA EDITION. Beginning in 2008, Virginia requires all pass-through entities (partnerships, LLCs that are taxable as partnerships, and S corporations) to withhold state income tax at the rate of 5% with regard to the Virginia-sourced income allocable to any nonresident owners. Doing so does not relieve the nonresidents of the obligation to file a Virginia income tax return, but the tax withheld may be claimed as estimated tax payments on their behalf on such tax returns.

VIRGINIA EDITION. The Virginia estate tax, which applied to estates of deceased persons with a gross value exceeding $2 million, has been repealed, effective for decedents who die on or after July 1, 2007.

VIRGINIA EDITION. Virginia has built its reputation as a very friendly place to start or operate a business. In fact, in August, 2006, Forbes ranked Virginia as the #1 state in the country in which to do business. Virgina ranked in the top ten in all six major categories that Forbes looked at. Texas was a distant second, but no state other than Virginia scored in the top ten in more than three categories.

WASHINGTON EDITION. In a 2007 case, Washington Citizens Action of Washington, et al v. State of Washington, et al, the state Supreme Court of Washington struck down a voter initiative (I-747) passed by voters in 2001, which would have limited property tax increases to 1%. The court found that part of language in the initiative which described the pre-existing property tax law contained an error, and despite the fact that the voter pamphlet that had described the initiative for voters correctly described the pre-existing law, the court used the technical error in the initiative language to hold that the constitutional amendment by the voters was unconstitutional and void. This is similar to what state courts in many states have done in recent years, for various technical reasons, to prevent such voter initiatives from limiting tax increases.

However, within one month, in response to the state supreme court's decision, the Washington Legislature met in a special one-day session in which they effectively nullified the court's ruling, by enacting legislation to give effect to the 1% cap on property tax increases, in accordance with the intent of voters who passed Initiative I-47.

WASHINGTON EDITION. Starting on July 1, 2008, in order to comply with Streamlined Sales and Use Tax Agreement, the applicable local sales tax rate on sales of delivered items in Washington will generally be determined based on the destination of the goods, rather than the location of the seller, where goods are shipped or delivered to the customer. (This change will not affect sales of items shipped out of the state, sales at a retail store, taxable services, or sales of vehicles, aircraft, watercraft, or modular homes.)

WASHINGTON EDITION. The Washington minimum wage increased to $7.63 an hour on January 1, 2006, and is the highest (state) minimum wage in the nation. (Some cities, such as San Francisco and Santa Fe, New Mexico, have higher minimum wages within their city boundaries.) With the annual inflation adjustment, the Washington minimum wage for 2007 is $7.93 per hour.

WEST VIRGINIA EDITION. In 2008, West Virginia legislation simplified employee wage withholding rules for West Virginia income tax by adopting the federal withholding schedules and procedures.

WEST VIRGINIA EDITION. Effective January 1, 2007, West Virginia reduced the corporate franchise tax rate from 0.7% to 0.55% and the corporate income tax from 9% to 8.75%. Additional legislation in 2007 will further reduce the franchise tax rate from .55% to .48% in 2009, with additional decreases to .41% in 2010, .34% in 2011, .27% in 2012, and .21% in 2013 and thereafter. The current 8.75% corporate income tax will be gradually reduced to 8.5% effective for tax years starting on or after January 1, 2009; 7.5% effective for tax years starting on or after January 1, 2012; 7% for tax years starting on or after January 1, 2013; and finally to 6.5% for tax years starting on or after January 1, 2014.

WEST VIRGINIA EDITION. Additional tax legislation in 2008 provides that the corporate franchise tax will be reduced further to 0.10% in 2014 and will be repealed, for tax years starting on or after January 1, 2015.

WEST VIRGINIA EDITION. Effective January 1, 2008, West Virginia will begin requiring sellers to withhold income at the rate of 6.5% on the estimated capital gain from sales of real estate located in West Virginia. In addition, the withholding tax rate payable by pass-through entities with respect to West Virginia-source income allocable to nonresident partners, members, or S corporation shareholders will increase from 4% to 6.5%, beginning in 2008.

WEST VIRGINIA EDITION. Effective January 1, 2006, the West Virginia sales tax rate on food and food ingredients (for human consumption) was reduced from 6% to 5%. "Food and food ingredients" does not include prepared foods or alcoholic beverages. "Prepared food" is defined as any of the following:

• Food sold in a heated state or heated by the seller;
• Two or more food ingredients mixed or combined by the seller for sale as a single item; or
• Food sold with seller-provided eating utensils, including plates, knives, forks, spoons, glasses, cups, straws, or napkins.

The tax rate on such food items decreased further to 4% on July 1, 2007 and will decrease to 3% on July 1, 2008. However, on July 1, 2007, the sales tax rate on soft drinks and all food sold through vending machines increased to 6%.

WISCONSIN EDITION. The Wisconsin minimum wage increased to $6.50 an hour on June 1, 2006. [WISC. ADMIN. CODE Sec. DWD 272.03(1m)(a)] In addition, the city of Madison had adopted its own minimum wage ordinance, which would have increased the city minimum wage to $7.75 plus an inflation adjustment by January 1, 2008, but the city ordinance has been pre-empted by the state legislature's enactment of amendments to the state minimum wage law in 2005. [WISC. STAT. Sec. 104.0001]

WYOMING EDITION. Effective July 1, 2004, a new sales tax exemption was enacted, effective until December 31, 2010, for the purchase or lease of machinery and machine tools used in manufacturing. The exemption applies only to a manufacturer classified by the Department of Revenue under the NAICS code manufacturing sector 31 - 33. (NAICS is the North American Industry Classification System, which was developed jointly by the U.S., Canada, and Mexico to provide new comparability in statistics about business activity across North America.) [WYO. STAT. Sec. 39-16-105(a)(viii)(D)(I-III)]

WYOMING EDITION. Effective July 1, 2006, Wyoming has amended its sales and use tax law to exempt sales of food for domestic home consumption. The exemption applies to substances, whether liquid, concentrated, solid, frozen, dried, or in dehydrated form, that are sold for ingestion or chewing by humans and are consumed for their taste or nutritional value. (This exemption had been applied on an emergency basis since March 20, 2006.) The exemption was to only be in effect for two years, unless extended beyond July 1, 2008, but has now been made permanent by act of the legislature in 2007.

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