Commonwealth Conversations: Revenue

AARP Tax-Aide looking for volunteers

Last year, some 24,000 older, low- and middle-income Massachusetts taxpayers received assistance and tax preparation from the nation's largest, free tax assistance program, AARP Tax-Aide.

The Massachusetts Department of Revenue is proud to partner with the American Association of Retired Persons (AARP) and the federal Internal Revenue Service (IRS) in the training of volunteers, 600 of whom provided help to individuals returning their state and federal income taxes.

AARP has provided an enrollment form for those who are interested, as well as a press release with more information. The commitment to work with clients in locales such as public libraries and senior centers extends from Feb. 1 to April 15.

This is a meaningful and challenging opportunity for community service. We'd like to hear from anyone who has volunteered in the past as an AARP Tax-Aide.

IRS strikes blow against refund anticipation loans

Posted by:

Robert Bliss, Director of Communication, Department of Revenue

In what is widely viewed as a blow against refund anticipation loans, the Internal Revenue Service announced earlier this month it would end in the coming tax season its policy of releasing information about back taxes and other debts owed by taxpayers.

In its story on the move, the Associated Press wrote that:

"The information, called debt indicators, has been included on acknowledgments the IRS sends tax preparers when it receives returns filed electronically ...The indicators served as warning that some or all of a person's refund might be held to cover old debt, including back taxes, unpaid child support or delinquent federal student loans."

Banks that fund refund anticipation loans use debt indicators to decide whether a taxpayer expecting a refund is a good risk for such a loan. The loans themselves have been criticized for years for charging high interest rates and fees in exchange for providing cash that may arrive only days ahead the federal tax refund check.

The National Consumer Law Center estimates that in tax year 2008, some 8.4 million taxpayers paid more than $738 million in fees taken for refund anticipation loans. In essence, taxpayers wind up paying the loan issuers interest on what is their money.

"We no longer see a need for the debt indicator in a world where we can process a tax return and deliver a refund in 10 days," said IRS Commissioner Doug Shulman. "We encourage taxpayers to use e-file with direct deposit so they can get their refunds in just a few days."

DOR agrees for all the reasons we outlined earlier this year in a statement urging taxpayers to file electronically and to forget about refund anticipation loans. Why pay interest on your own money?

Average single-family home property tax increase of 3.3 percent lowest in a decade

City and Town, the weekly on-line newsletter of the Department of Revenue's Division of Local Services, has just published a well-researched and quite comprehensive article on average single-family property tax bills for FY10.

In a nutshell, the article concludes that "the weighted average tax bill increased in 2010 by $140 or 3.3 percent, to $4,390, the smallest percentage increase of any year in the past decade. The percentage increase during this time ranged from the current low to a high of 6.7 percent in 2002.

"The cumulative percentage increase of this period is 55.3 percent, an average of 5.5 percent each year. Generally speaking, the average bill has recently increased at a slower pace suggesting a few factors are at play, such as leaner budgets, reduced excess levy capacity, and Proposition 2.5 override fatigue."

Proposition 2.5 allows a community's tax levy to increase 2.5 percent annually, with new growth adding additional levy capacity. 

The article written by Terry Williams of the Division of Local Service's Bureau of Accounts, and James Paquette, of DLS's Bureau of Local Assessment, looks at property tax bills, property values and community trends. It also includes a link to an easy to read spreadsheet ranking each city and town and comparing previous year's property tax rates.

(Editor's note: DLS has also published a spreadsheet outling the annual percentage average single family tax bill increase over each of the past 20 years. Not only was the 2010 increase the smallest in those 20 years, it also marked the fourth consecutive year of decline in the average annual increase, which is the first time that has happened in 20 years.) 

Gov. Patrick signs sales tax holiday law for August 14-15

A sales tax holiday is on tap for the weekend of August 14-15 now that Gov. Deval Patrick has signed an Economic Development bill that includes a provision for the sales tax holiday.

The rules of the road for this holiday are virtually the same as for all the previous sales tax holidays. Many non-business retail items costing $2,500 or less are exempt from the sales tax, but some items --motor vehicles, motorboats, meals, telecommunications services, gas, steam, electricity, tobacco products, and anything else costing more than $2,500 -- are not.

The sales tax exemption applies to sales of tangible personal property bought for personal use only; purchases by corporations or other businesses and purchases by individuals for business use remain taxable.

There is no sales tax on beer, wine and alcohol during the holiday. There is also no sales tax on single items of clothing that cost up to $2,500.

The Department of Revenue estimates that taxpayers will save somewhere between $20 million and $23 million over the holiday period. There was no sales tax holiday last year. In previous years, the holiday has saved taxpayers between $15 million and $17 million.

For detailed information on the sales tax holiday weekend, DOR has published a Technical Information Release. For a copy of the announcement of the bill signing, and details on other provisions of the economic development law the Governor signed today, click here.

July gets new fiscal year off to a healthy start

The Department of Revenue today reported that the monthly revenue collection for July came in at $1.353 billion, an increase of $103 million over July of a year ago, representing an 8.2 percent increase and exceeding the montly benchmark by $79 million.

July is a small month for revenue collection as there are no estimated payments for individuals and virtually no such payments for businesses, so the growth spurt came in income tax collections (mostly withholding) and in sales tax.

To examine a one-page spreadsheet outlining the month's collection, click here.

The Commonwealth's target revenue collection for FY11 is $19.098 billion. To put that in perspective, the Commonwealth in FY08 collected $20.88 billion, before the economy went into recession, so there is still nearly a $2 billion gap between FY08 and projected FY11 collections. The FY10 collection was $18.538 billion.

Municipal Relief Bill enacted

Earlier this week, Gov. Deval Patrick signed with an Energency Preamble the new Municipal Relief law . The preamble allows the provisions of the law to take immediate effect.

Highlights of the law, formally titled An Act Relative to Municipal Relief, include:

-- Allowing cities and towns to extend their pension funding schedules out to 2040, rather than meeting the previous deadline of 2030 which seemed all but impossible given unprecedented asset losses from the stock market decline of 2008;

-- Giving communities more flexibility in their borrowing by allowing the financing of projects over a term matching the asset's useful life up to 30 years;

-- Permits communities to adopt a limited early retirement program;

-- As noted in City and Town article of July 22, "Certification Year Reshuffle," restructures the schedule for triennial property tax recertifications.

 There is much more in the new law, including changes in bidding, intermunicipal agreements, and provisions to stimulate regionalization and shared services. 

FY10 revenues come in $78 million higher than expected

The Department of Revenue released its monthly revenue report for June yesterday, a document that also includes the fiscal year-end report, and the numbers were a bit of a surprise.

June turned out to be a much bigger than expected month, $240 million more than last June and $149 million above what was expected for the month. This robust performance more than erased what looked like a $70 million revenue shortfall at the end of May, and put the revenue ledger for FY10 $78 million into the black.

The FY10 collection was $18.538 billion, up from the FY09 collection of $18.259 million. Not much cause for celebration, though, when you recall that in FY08, the revenue collection was $20.88 billion, back when capital gains tax revenue was pouring in. The FY11 estimated collection is about $19.050 billion, so it will take a few more years before revenues return to the highwater mark of FY08.

Without the sales tax increase to 6.25 percent that took effect August 1, 2009, FY10 collections would have been less than FY09. Sales tax revenue of $4.612 billion in FY 10 was $743 million more than in FY09, and that pushed the total revenue collection higher than in FY09.

Signs of economic recovery were clearly visible in tax types tied to current economic conditions. In the fourth quarter of FY10, revenues grew 5.7 percent factoring out the sales tax increase compared to the fourth quarter in FY09, due to improvement in withholding, income tax estimated payments for tax year 2010, sales tax and corporate taxes.

The removal of the sales tax exemption for beer, wine and alcohol produced an estimated collection of $97 million in FY10, about $19 million higher than forecast. The volume of alcoholic beverages sold, as measured by the alcohol excise tax (a penny for a bottle of beer, 11-cents for a bottle of wine, etc.) declined 1 percent, which did not indicate a dramatic weakening in sales.

DOR rules that wind turbines are exempt from the sales tax

Thinking of developing a wind farm, or building a single wind turbine?

In a letter ruling issued earlier this month at the request of a taxpayer, DOR ruled that sales of machinery used to construct a wind turbine, tower and components, and the supporting foundation are exempt from Massachusetts sales tax under G.L. c64H Sec. 6(s).

The reason? The turbine, tower and components and supporting foundation qualify as machinery that is used directly and exclusively in furnishing electricity that is delivered to consumers through mains, lines or pipe. Such machinery, according to 64H Sec. 6(s), is exempt from sales tax.

The ruling on wind turbines breaks new ground in that DOR has never before been asked the question about the applicability of this exemption to wind turbines.  It probably won't be the last time.

While the letter ruling applies only to the individual taxpayer, it also sets a precedent which well might apply to which other taxpayers engaged in a similar project. Such taxpayers are urged to contact DOR for clarification rather than to assume the exemption.

The ruling in its concluding paragraph notes that "with respect to other machinery required to build the wind turbine, tower or foundation, such machinery is exempt only if it becomes a part of the integrated and synchronized system that furnishes the electricity to consumers ... for example, machinery such as erection cranes, support cranes and bulldozers are subject to tax." 

But the blade, turbine, tower and the equipment used to capture the energy and sent it on its way are exempt from the sales tax. 

With interest growing in harnessing the wind to provide clean and renewable energy, this letter ruling may provide some additional financial incentive to wind energy developers.

Plumbing the mysteries of sales tax on (some) cell phones

Posted by:

Robert Bliss, Director of Communication, Department of Revenue

DOR has received several inquiries lately from buyers of new I-Phones asking why the sales tax charged on the price of the phone reflected a substantially higher purchase price than the actual price paid.

For example, a buyer paid $300 for the phone but was charged sales tax as if the phone's real price was $699. How can this be is not an unreasonable question.

Welcome to the world of bundled and unbundled cell phone transactions. Time for a little deconstruction.

The underlying issue here is that some cell phone companies bundle the cost of the new phone with a service contract. This is called a bundled transaction in which real cost of the phone is in effect subsidized by the purchase of the service contract. At the dawn of the era of cell phones, DOR in 1993 issued Directive 93-9 which basically states that in a bundled transaction, the real price of the phone for purpose of calculating sales tax is the price that would have been paid for the same phone in an unbundled sale without a service contract.

More recently, DOR's resident expert on this subject phrased it this way: "In simplest terms, a vendor selling a phone in a transaction where a purchaser is also required to sign a service contract with a telecommunications provider is receiving consideration both from the purchaser and a substantial commission from the telecommunications provider. Because the actual amount of the commission is considered proprietary information between the vendor and the telecom provider, DOR approximates the 'true' consideration for the sale of the phone by requiring tax to be collected on the 'unbundled' advertised price."

By way of further clarification, last year DOR issued in March Letter Ruling 09-2 in response to a request from a cell phone manufacturer. Since letter rulings are issued to individual taxpayers, the name of the company and any information that might identify it is stripped out of the letter ruling, but the discussion is there for all to see. Also, the letter ruling refers to a sales tax of 5 percent, which later last year was increased to 6.25 percent.

So, as in any sales transaction, shop around and compare prices to get the best deal, and to get the lowest possible sales tax.

Issuance of license suspension notices nets $26 million in back taxes

For nearly two years, the Department of Revenue has had the legal authority to issue notices of intent to suspend drivers' and other professional licenses in cases where taxpayers have ignored other means of collection of back taxes.

In the current fiscal year, which is soon to close on June 30, DOR has received payments from 2,979 taxpayers who received the notice, resulting in the collection of $17 million in back taxes.

In FY09, the program's first year, 1,308 taxpayers made payments of $9 million.

Issuance of license suspension notices has long been utilized for the collection of overdue child support payments. Since the inception of this program in Child Support Enforcement in 2004, more than $200 million in child support has been collected.

The topic of license suspension came up last week at a meeting DOR held for tax practitioners at 100 Cambridge Street in Boston. To see a video of the discussion go to DORMTV and click on the practitioners tab. 

As you will see from the video, the issuance of a notice of intent to suspend a driver's license comes only after other collection methods have failed to produce any kind of resolution or payment plan. Suspension is a last resort for DOR, and is reserved for taxpayers who owe substantial amounts.

To review the Technical Information Release outlining the license suspension program click here. And to review Sections 22, 23 and 24 of the Acts of 2008 mentioned in the TIR, click here.

A taxpayer who receives a notice of intent to suspend has 30 days to respond. After that, the Registry of Motor Vehicles sends a notice to the taxpayer that the license will actually be suspended in 10 days.