Commonwealth Conversations: Revenue

City and Town examines MASSPCSO sham transaction case

Division of Local Services attorney James Crowley has written a very clear and compelling story on a complicated tax case for the latest edition of City and Town , the free DLS publication emailed biweekly to thousands of local officials across the Commonwealth.

Aptly titled "That's Nobody's Business: Sham Corporation Denied Personal Property Tax Exemption," Crowley surgically dissects an Appeals Court decision issued last year that upheld an Appellate Tax Board denial of a property tax exemption to a leasing corporation.

The court ruled that the leasing corporation, MASSPCSO, formed by the wireless telecommunications company Sprint Spectrum, L.P., was a sham because it did not engage in business and was created solely for the purpose of avoiding taxes.

Sprint formed the sham leasing company as a way to transfer taxable equipment to a subsidiary (MASSPCSO) and then lease back the equipment for use in Massachusetts as a way of avoiding local personal property taxes. The local assessors didn't buy the scheme, and neither did the courts.

As Crowley noted, "the Appeals Court observed that MASSPCSO had no employees; failed to keep separate bank accounts; did not independently make investments; did no business with other parties except where it was incidental to leasing equipment to the parent; did not lease property to third parties; could not act independently; did not purchase equipment or be responsible for debt incurred in conjunction with said purchases."

In other words, a classic sham transaction.

DOR to hold 14 meetings on Sr. Circuit Breaker Tax Credit

Brian Lynch of DOR's Office of Advocacy, Training and Communication begins a two-month series of presentations on the Senior Circuit Breaker Tax Credit starting tomorrow at 1 p.m. in Wellesley at the Council on Aging, 219 Washington St.

DOR's web homepage has a complete list of Brian's tour, which is designed to educate taxpayers 65 and older about the benefits of the credit. All sessions will be held at local Council on Aging offices.

For tax year 2011, the credit is worth as much as $980 for eligible taxpayers 65 and older who either own or rent their home. Seniors who live in public or subsidized housing are not eligible for the credit.

Boston Globe weighs in on bundled cell phones

The Boston Globe today took its turn today at examining the sales tax policy governing bundled cell phone transactions.

Reporter Michael Farrell's story is a fair recitation of the history of the policy. Farrell noted that one wireless seller, Sprint, is paying the difference in sales tax between the sales price of the phone and the retail or wholesale price on which the tax is actually computed, unlike other wireless sellers.

This blog has published numerous posts and comments on bundled cell phones, and welcomes Farrell's contribution to the discussion.

If you'd like to sample some of the back and forth, type in "bundled cell phone transactions" in the blog search field (scroll down from the top of the blog and you will find it on the right hand side) and have at it.

Income tax estimated payments come up short in December

DOR released today the December revenue report and the story is all about income tax cash estimated payments, or the lack thereof.

December's collection of $1.969 billion was $87 million less than projected, due almost entirely to a $93 million shortfall in income tax cash estimated payments.

The December summary spreadsheet lays out the numbers. Whiles sales tax revenue was above benchmark and corporate/business tax below benchmark, they offset each other. But there was no offset for the shortfall in income tax cash estimated payments.

There is no certain explanation for the shortfall. These payments are frequently received in December so that taxpayers may use them as deductions on their federal 2011 tax returns. This year, there were two fewer December deposit days than a year ago, and the final deposit day fell on a holiday weekend, so some of these payments may be pushed into January.

Indeed, DOR has always cautioned that December and January need to be viewed as a whole when it comes to cash estimated payments.

Income tax cash estimated payments are made by taxpayers who have reason to believe they will owe tax on income earned from gains recorded on investments or dividends.

It is possible that some taxpayers who continued to make estimated payments in 2011 based on their gains in 2010 have now realized that they do not owe any additional tax, and thus they are not paying additional income tax cash estimated payments.

The Commonwealth received $192 million in such payments last month, which was $90 million less than December 2010 and $93 million less than forecast. On a year-to-date basis, however, income tax cash estimated payments of $686 million are just $33 million less than a year ago, down 4.6 percent, and $84 million less than forecast.

The flow has not stopped, but it has slowed down. "We should have a more complete picture on income tax cash estimated payments later this month," DOR Commissioner Amy Pitter said.

Overall, revenues of $9.847 billion for the first half of FY12 finished $252 million ahead of a year ago, an increase of 2.6 percent, and $49 million below the revised FY12 benchmark of $21.010 billion. 

2011 sales tax holiday saved consumers estimated $20.98M

DOR has released its final report on the 2011 sales tax holiday weekend that occurred on August 13-14, estimating that the amount of sales tax revenue foregone was approximately $20.98 million, exceeding the estimate of $19.9 million from the 2010 sales tax holiday weekend.

Last summer, just prior to the holiday, DOR issued a preliminary estimate of $20.5 million in potential savings to consumers from the holiday weekend.

The most commonly asked question about this report is why can't DOR say precisely how much sales tax revenue was foregone to the Commonwealth and saved by taxpayers.

Sales tax is reported to the Commonwealth no later than the 20th of the month following. For example, information on December sales tax collections will not be reported until January 20th.

Retailers do not list individual transactions by date when they report that data,  but simply lump together the entire amount of taxable retail sales for the month, and then apply the 6.25 percent sales tax and forward that amount to the Commonwealth.

As a result, DOR receives no reporting on the volume of taxable or untaxable sales on any given day or days. Individual retailers undoubtedly have some information on this, but they are not required to share it with DOR.

So in the absence of hard data, DOR estimates using the methodology outlined in the report.

 

Corporate tax rate drops to 8.0 percent effective January 1

DOR announced earlier this month a drop in the personal income tax rate effective for tax years beginning on or after Jan. 1 from 5.3 percent to 5.25. This reduction extends to gains from investments held for more than a year (gains on investments held for less than a year are still taxable at 12 percent).

A second tax reduction also kicks in on Jan. 1, when the corporate tax rate drops from 8.25 percent to 8.0 percent.

And, as was the case with the personal income tax reduction, there is a backstory to the drop in the corporate tax rate.

Gov. Deval Patrick in his first year in office, in 2007, proposed to change the way the Commonwealth levies the corporate income tax with the introduction of a proposal to adopt combined reporting, a system that is now in place in about half the states. The idea was to come up with a corporate tax system that made it harder for corporations to shift taxable profits earned in Massachusetts to low-tax or no-tax states.

The Legislature rebuffed the governor's initial effort, but agreed to the appointment of a special commission to look at corporate taxation. In December 2007, the commission issued its report, and on the basis of recommendations in the report, the governor filed legislation to implement combined reporting.

In July of 2008, the governor and legislative leadership signed into law combined reporting. Importantly, the law included a gradual reduction in the corporate tax rate, which at the time was 9.5 percent. The rate was to be gradually lowered, to 8.75 percent effective for tax years beginning on or after Jan. 1, 2010; to 8.25 percent effective for tax years beginning on or after Jan. 1, 2011, and to 8.0 percent effective for tax years beginning on or after Jan. 1, 2012.

Combined reporting, in tandem with the rate cut, meant that the big multi-state or multi-national corporations would often pay more, while the in-state corporations in would in certain cases pay less, with the net effect producing a fairer corporate tax system.

In a press release issued yesterday, the Patrick Administration noted that the 2008 tax reform law meant that "Massachusetts-based businesses are paying a lower corporate tax rate while several thousand multi-state or multi-national companies are also paying at a lower rate, but reporting more in taxable income because they can no longer shift taxable profits to low-tax or no-tax jurisdictions."

The corporate tax reform law of 2008 also gradually reduced the financial institution tax rate from 10.5 in FY08 percent down to 9.0 percent effective Jan. 1, 2012.

The rate for S corporations with more than $9 million in annual receipts was modified so that the corporate rate (for a business corporation or financial institution as applicable) for the year minus the personal income tax rate for the year equalled the rate for the large S corporations.

The rate for S corporations with between $6 and $9 million in annual receipts was modified to 2/3 of the rate applicable to larger S corporations.

Corporate and business tax collections have risen and fallen with the economy since enactment of the law. In FY07, before the law took effect, corporate tax collection was $2.476 billion. In FY08, corporate tax collection hit $2.549 billion, but dropped to $2.099 billion in FY09 as revenues overall crashed. Since then, corporate revenues have recovered modestly, in line with the overall economy, to $2.119 billion in FY10 and $2.228 billion in FY11.

 

 

 

 

 

 

 

 

 

 

Heads on beds puts dollars in city and town treasuries

City and Town, the twice-monthly publication of the Division of Local Services, has just published its first in-depth review of the local option room occupancy tax since it was raised from 4 percent to 6 percent in the summer of 2009.

The article comes with a link that shows the amount of local revenue generated from this tax in each of the 177 cities and towns (50 percent of those in the Commonwealth) that has adopted the optional room occupancy tax, and the additional amounts raised by the 93 cities and towns that have elected to tax at a rate higher than 4 percent.

The local option tax generated a record $130.4 million in FY11 for cities and towns, and does not appear to have weakened demand for rental rooms in the Commonwealth, given the data presented in the article.

The article notes that 124 of the Commonwealth's 352 cities and towns, or 35 percent, either have no rental rooms or fewer than three businesses generating room rental income.

That leaves about 15 percent of the state's cities and towns that have foregone the opportunity to generate tax revenue from the local option room occupancy tax.

Personal income tax rate resumes march downward

 

 

Posted by:

Robert Bliss, Director of Communication, Department of Revenue

 

The Department of Revenue yesterday certified that the personal income tax rate will drop from 5.30 percent to 5.25 percent effective January 1, 2012. The savings to taxpayers will vary, but for most taxpayers it will be less than $40 and as little as $5 or $10 for those with smaller taxable incomes.

Despite the relatively small magnitude of the reduction, there is a lot of fiscal and politcal history behind it. The 0.05 percent decrease will mark the first decrease in the income tax rate in 10 years, and is the result of a legal process laid out in legislation approved in 2002.

That year, in the wake of both the dot com crash and the post-9/11 economic downturn, tax revenues in the Commonwealth fell and legislators scrambled to fill the gap. The House proposed to freeze the rate at 5.3 percent; it had been scheduled to drop to 5.0 percent effective Jan. 1, 2003, as a result of a voter referendum that had lowered the rate from 5.95 percent to 5.6 percent on Jan. 1, 2001 and to 5.3 percent on Jan. 1, 2002.

The Legislature wound up approving the freeze as well as a reduction in the value of personal exemptions for both single individuals and couples; the exemption dropped from $4,400 to $3,300 for individuals, and from $8,800 to $6,600 for couples.

In order to marshall legislative support for these tax increases, and to keep faith with voters who had approved the rate reduction to 5 percent, the legislature also created the process by which the personal exemptions would be restored to full value in four annual steps after which the income tax rate itself could resume its downward march.

The process involved a series of triggers and certifications. The first trigger; inflation adjusted baseline revenue growth had to exceed that of the previous fiscal year by 2.5 percent. But before final certification, revenues had to continue to remain steady, adjusted for inflation, over the months of September-November. If inflation adjusted revenue growth was not negative compared to the previous year in those months, the final certification for a rate reduction (or restoration of the personal exemption) would be issued no later than December 15.

That process was followed in the years subsequent to 2002, and the full value of the personal exemptions was restored in 2008 after four years of revenue growth.

But then the next and bigger revenue crash occurred in FY09, a year in which revenues fell more than $2.5 billion, removing the possibility of lowering the tax rate in accordance with the law.

It was not until FY11, which saw inflation adjusted revenue growth of 7.2 percent over FY10, followed by the required monthly certifications in the fall, that all requirements were met for the rate reduction that was announced yesterday.

 

Warning: Tax resolution firms dangerous to taxpayer health

Taxpayer Advocate  Dennis Buckley has issued the following alert:

So-called tax resolution companies continually market themselves as the solution to a taxpayer’s problems. Their pitch is simple: pay our company some money and our tax experts will lower and settle your tax liability.

These claims are false. DOR has issued warnings about these claims. If something is too good to be true, it probably isn’t, and that is certainly true about what these companies promise. DOR publishes all Offers in Final Settlement in its annual report. None were reached with the help of a tax resolution company; all were negotiated directly between the taxpayer and DOR.

These companies take money that taxpayers would be better served spending on reducing their tax liabilities. They offer false hope.

But the Taxpayer Advocate has just heard of a new tack from a tax resolution company that sinks to a new low: The company advised a client to deliberately break a payment agreement worked out with DOR.

 Specifically, the company advised a client to deliberately bounce payment checks sent to DOR as a way to get a better payment plan.

This is bad strategy and advice. In the case of this particular taxpayer, a bank levy was issued and an account used to make payroll was frozen. After the taxpayer contacted DOR, the levy was reduced to allow for payroll to be met. The taxpayer got no benefit from the company, only more problems.

Despite the promise of television and radio commercial, these companies will take your money and deliver nothing but broken promises.

From DOR's Briefing Book: more capital gains whiplash

Commissioner Amy Pitter presented DOR's revenue estimates for FY12 and FY13 in testimony heard Monday by the Ways and Means Committee at their annual Consensus Revenue Estimate Hearing.

The commissioner projected FY13 revenues at between $21.612 to $21.763 billion, up from $560 million to $683 million over the FY12 estimate of $21.046 billion to $21.080 billion.

Also presented to the legislators was DOR's FY13 briefing book, which is a treasure trove of economic analysis and forecasting.

The book is also the best single source document for DOR's view of capital gains tax collections, which over the years have proved to be exceptionally volatile and a trigger for deep revenue swings both up and down, so much so that legislation now enacted requires that any capital gains collection in excess of $1 billion go straight to the rainy day fund rather than into the general fund.

On pages 20-21, DOR outlines its estimates. Capital gains taxes increased from $500 million in tax year 2009 (down from $2.155 billion in tax year 2007) to an estimated $986 million in tax year 2010, an increase of nearly 100 percent.

On a fiscal year basis (tax years are calendar years; fiscal years run from July 1 to June 30 and span two calendar years) FY11 capital gains taxes are estimated at $991 million, an increase of $418 million or 73 percent from FY10.

DOR projects that capital gains will stay about the same in tax year 2011 at $986 million, but increase to $1.550 billion in tax year 2012.

On a fiscal year basis, that translates into estimated capital gains of $1.095 billion in FY12, an increase of $105 million over FY11, and capital gains revenue of $1.412 billion in FY13, an increase of $317 million over FY12.

Why the increase? DOR's forecast assumes that the Bush tax cuts will expire at the end of 2012, triggering a sell off of assets before the capital gains tax rate increases from 15 percent to 23.8 percent, along with the introduction of a 3.8 percent Medicare tax on realized capital gains included in the 2010 national health care reform law. 

As a result, DOR forecasts an increase in capital gains of 57.2 percent in tax year 2012, and then a precipitous drop of 42.4 percent in tax year 2013.