If your Virginia business is required file income tax returns in multiple states, you may be paying too much in BPOL taxes. Virginia localities are authorized to impose a Business, Professional and Occupational License (BPOL) tax for the privilege of doing business in the locality. The tax is also known as a “business privilege tax” or “gross receipts tax.” It’s bad enough that the Virginia BPOL tax imposed by most localities in the Commonwealth is a tax on all business receipts regardless of expenses. To make matters worse, the most broadly applicable exclusion allowable to multistate businesses is often misrepresented by localities, leaving the unsuspecting taxpayer with a larger annual bill than may be necessary.
Generally, gross receipts subject to BPOL taxation include only those receipts attributed to a place of business within a jurisdiction. For a service provider, gross receipts are attributed to the place of business from where the services are performed or from which the services are directed or controlled.
However, in computing a business’s BPOL tax liability, a deduction is allowed for receipts attributable to business conducted in another state if the taxpayer is subject to an income tax return in that state. This deduction is often overlooked by taxpayers, as the localities’ returns are typically formatted in a way that leads taxpayers to believe that the initial allocation of receipts to a definite place of business in the locality and the deduction are one in the same.
In recent years, the Virginia Department of Taxation has issued a number of rulings that aim to clarify the out-of-state deduction. The key principle from these rulings is that the sourcing of revenue for state income tax purposes is not the basis for determining the amount of the BPOL deduction. Unfortunately, a taxpayer preparing a seemingly uncomplicated BPOL tax return shouldn’t be blamed for believing that the two sourcing regimes are the same. Take one look at the instructions to a Fairfax County BPOL return. A taxpayer will find specific instructions asking them to provide, in support of the deduction, all of its state income tax returns as well as the apportionment schedules included with the returns.
Thus, most taxpayers tie their receipts sourced to Virginia localities on their BPOL tax returns to the receipts sourced within and outside of Virginia on their state income tax returns. Depending on the facts of how a particular business provides it services, the amounts could be the same. However, believing that is always the case can result in significant over-reporting of gross receipts for BPOL tax purposes. If your business is a service provider based in Virginia and it files income tax returns in multiple states, it’s possible that you are paying too much in BPOL taxes.
Are you a Maryland resident facing the possibility of incurring Maryland estate tax because your estate – including house, life insurance, retirement assets, and investments – exceeds $1 million?
If so, you may be considering moving away from Maryland – possibly to Virginia, Florida, North Carolina, or one of the other 28 states without estate tax – to reduce your tax burden. Between 1992 and 2011, many Marylanders moved to other states,taking with them over $7 billion in income, as well as the related taxes on income, sales, and property. Clearly, Maryland’s estate tax has contributed to the impetus to move. For more evidence, check out Forbes’ “Where Not to Die” list for 2014.
In an effort to stem the outgoing financial tide and enhance Maryland’s economic competitiveness, Maryland has recently enacted changes to its estate tax law. The state has raised the tax exemption in stages from the current $1M to $4M by 2018 and, in 2019, will “recouple” the Maryland exemption with the federal exemption.
The federal exemption currently is $5.34M, and is indexed for inflation. Assuming 2% annual inflation, by 2019 the federal exemption – and the then recoupled Maryland exemption – could approach $6M. For Maryland residents, this change should reduce the Maryland estate tax burden and may eventually make estate planning easier, although perhaps not for a few years.
Gifting, however, may continue to be a good planning strategy since Maryland does not have a gift tax.
Beginning in 2019, Maryland will introduce “portability.” This will allow a surviving spouse to use both his or her own Maryland exemption plus the unused portion of their deceased spouse’s exemption – namely, the portion of the deceased spouse’s exemption not needed by the deceased spouse’s estate to save estate tax. In effect, in 2019 a married couple may have a combined estate tax exemption of about $12 million, even with the use of simple wills.
With these changes to the Maryland estate tax, moving from Maryland to save tax may be losing some of its appeal. Good news for those who would prefer to stay in the area.
Virginia lawmakers have approved legislation that enhances the Commonwealth’s research and development income tax credit. The legislation, which makes a number of changes to the R&D credit, takes effect for tax years beginning on or after January 1, 2014. Virginia is among a number of states, including Alabama, Arizona, Illinois, and Pennsylvania, which have considered enacting or improving research and development tax incentives this year. Maryland’s R&D credit also was recently given a facelift.
The Virginia legislation, which was approved by the Governor Terry McAuliffe on March 7, 2014, increases the amount of the R&D credit from 15 percent on the first $167,000 of qualified expenses to 15 percent of the first $234,000 of qualified expenses. Thus, the credit has gone from approximately $25,000 to $35,000. For qualified expenses conducted in conjunction with a Virginia institution of higher education, the R&D credit will increase from 20 percent of the first $175,000 to 20 percent of the first $234,000. Further, the General Assembly increased the maximum amount of annual R&D credits that can be issued each fiscal year from $5,000,000 to $6,000,000.
Another significant change to the R&D credit pertains specifically to pass-through entities (i.e., partnerships, limited liability companies, and S Corporations). In lieu of having the credit being allocated to the pass-through entity’s owners, the new law allows the pass-through entity to elect to claim the credit at the entity level. The legislation instructs the Department of Taxation to development guidelines on how the entity level credit would be implemented, but presumably the pass-through entity would receive payment from the department for the amount of the credit.
This election makes it more likely that the benefit of the credit will be reinvested in Virginia’s economy. The General Assembly also showed its commitment to attracting research and development activities in Virginia by extending the expiration of the credit through 2018, rather than at the end of 2015 as originally specified.
If you have any question about state tax credits, please contact your Aronson tax advisor or Michael L. Colavito at 301.231.6200.
Keeping track of Virginia’s sales tax rules applicable to construction contractors is no easy task, especially if your business installs or affixes items to real property. There are various factors that must be considered in determining whether purchases and sales engaged in by such businesses are subject to sales tax. The Virginia Tax Commissioner recently issued a ruling addressing when certain “contractors” are considered to be retailers, allowing the property that will be installed to be purchased by the contractor without the addition of sales tax. Va. Public Doc. No. 13-204, 11/1/2013.
Generally, Virginia requires that contractors pay sales and use tax on purchases of tangible personal property used in the performance of a contract. However, an exception applies for businesses that: (1) keep an inventory of materials and items which will become a component part of the product to be installed; (2) maintain a wholesale or retail place of business; and (3) perform installation of the items sold.
This most recent ruling addressed when a business is deemed to be maintaining inventory. The taxpayer in the ruling sold and installed shelves and cabinets. The shelves and cabinets were ordered from a third party and stored by the taxpayer until the time of installation. The Tax Commissioner concluded that the taxpayer failed to meet the inventory requirement because the taxpayer purchased its materials on a job-to-job basis. Furthermore, the Commissioner noted that the taxpayer’s regular stock of trim pieces, parts used to make modifications and leftover materials also were not inventory because these materials did not constitute most of the component items required to produce a finished product. Thus, the taxpayer in the ruling was deemed to be a contractor liable for sales tax on purchases of tangible personal property used in its contracts.
The types of businesses that typically meet the “retailer” exception include sellers and installers of fences, Venetian blinds, window shades, awnings, storm windows and doors, floor coverings, cabinets, kitchen equipment, window air conditioning units, and other similar items. Sellers of these types of products that meet the requirement of the exception have the ability to purchase inventory tax-free by providing their suppliers with a retailer certificate. The seller then must collect tax on the sale of the items to its customers. However, ensuring that your business meets all of the requirements for being a “retailer” is essential in order to mitigate the risks of being issued an assessment for sales tax.
If you have questions about how sales tax applies to your business, please contact your Aronson tax advisor or Michael L. Colavito Jr. at 301.231.6200.
Virginia’s increased sales tax rates take effect on July 1, 2013, and complying with the new rates will not be as easy as hard coding a new rate into your sales tax compliance system. Not only will the general rate increase from 5% to 5.3% (this rate includes the local 1% tax), an additional 0.7% tax will apply for all sales sourced to the Northern Virginia or Hampton Roads regions (resulting in a 6% total tax rate for sales in these regions).
Determining how to properly source a sale within or outside the Northern Virginia and Hampton Roads regions will be a concern for businesses that have a sales and use tax collection obligation in Virginia. Typically, when a multi-state business makes an interstate sale, the tax that applies is based on the destination state. Thus, if a customer in Virginia orders a product from a retailer in Maryland and the product is shipped to Virginia, Virginia sales or use tax applies to sale. The same rule must apply for an intrastate sale within Virginia – right? Wrong.
The local sales tax rate that applies in Virginia is based on the place of business of the dealer collecting the tax, without regard to the city or county of use by the purchaser or delivery to the purchaser. For example, a customer located in Roanoke (which is not in the Northern Virginia or Hampton Roads region) orders a product over the phone from a dealer located in the City of Fairfax (which is located in the Northern Virginia region). The product will be delivered to the customer in Roanoke. The sale should be sourced to the City of Fairfax and the dealer should collect 6% sales tax on the purchase, which includes the 0.7% regional rate. This rule will apply regardless of when title to the property passes to the customer, so even if title does not pass until the delivery is made, the rate is still based on the seller’s location.
However if a business owes use tax on a purchase, the location of use will still dictate the rate that applies. For example, a construction company located in the City of Fairfax purchases materials from an out-of-state vendor that is not required to collect sales or use tax on the sale. The contractor uses the materials for a construction job in Winchester, Virginia. The construction company would owe use tax at the 5.3% rate because Winchester is not located in either of the regions where the 0.7% regional tax applies.
We can only hope that the added stress from determining the correct sales tax rate in Virginia will be balanced out by reduced traffic in the state, which was the primary motivation for the increased rates.
If your company has question about transitioning to the sales tax rates in Virginia, please contact Michael L. Colavito or your Aronson LLC tax advisor at 301.231.6200