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They have to be, since old, out-of-date legal or tax information is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.)
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:
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.
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.)
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.