Maine Tax Law Blog

Maine Tax Reform Being Studied -- Again

The Taxation Committee of the Legislature is holding a series of sub-committee meetings this fall to discuss another effort aimed at reforming Maine's tax system.  The sub-committee has invited a number of academics, business people, accountants, economists, lawyers and other "experts" to give perspectives on what tax reform should look like.  The major themes being discussed include reducing the top Maine income tax rate, broadening the sales tax base by eliminating exemptions and exclusions, tax simplification, tax fairness, tax volatility and related topics.  Pierce Atwood is closely monitoring these discussions.  If you have questions, please contact Jon Block or Andrea Maker. 

Maine Creates Friendlier Skies for Aviation

A group of nonresident aircraft owners, represented by Pierce Atwood's State and Local Tax Group, has successfully challenged Maine’s 5% use tax on aircraft that land in the State.  The Maine Supreme Court ruled that certain aircraft owned by non-residents could not be taxed if they were “substantially used” outside of Maine.  As a result of this case, a number of taxpayers, though not all, saw their tax assessments cancelled.  Blue Yonder LLC v. State Tax Assessor, 2011 ME 49. 

Second, the recently enacted state budget has taken further important steps to improve Maine’s position in the aviation field.  Effective July 1, 2011 and continuing until June 30, 2015, Maine will exempt from sales and use tax the “sales, use or leases of aircraft and sales of repair and replacement parts exclusively for use in aircraft or in the significant overhauling or rebuilding of aircraft or aircraft parts or components.”  P.L. 2011, Ch. 380, Part GGGG.  This law will not only exempt all aircraft from Maine’s sales and use tax effective July 1st, it will also allow Maine’s aviation businesses to compete on a level playing field for repair and overhaul work that currently goes to states that do not tax aircraft repair parts.  From that perspective, this new law is likely to create jobs and spur economic activity in and around Maine’s airports and at the former Brunswick Naval Air Station.  Pierce Atwood is proud to have worked in conjunction with several of its aviation clients, associations and other interested parties to help make this legislation a reality.  To learn more about this new law and its positive implications for the State, see Maine does away with aircraft sales taxes from the June 22nd edition of the Bangor Daily News.

If you have questions about the applicability of the Maine Supreme Court decisions or the new legislation to your particular aircraft or aviation business, please contact Jon Block.

Important Changes to Maine’s Administrative Tax Appeal Process

Pierce Atwood State and Local Tax Group

 Client Alert         

 Important Changes to Maine’s Administrative Tax Appeal Process

 

 

Governor LePage has signed into law LD 1371 (P.L. Ch. 439), An Act To Promote Fair and Efficient Resolutions in Tax Disputes, which makes several significant reforms in the way Maine Revenue Services deals with Taxpayers.  http://www.mainelegislature.org/legis/bills/bills_125th/chapters/PUBLIC439.asp

The major goals of the law are to make the process of appealing a tax assessment more fair and less burdensome for taxpayers at the administrative level, and to create a more robust Taxpayer Advocate to assist taxpayers who are dealing with issues at Maine Revenue Services.  This legislation was designed, drafted and promoted by Pierce Atwood.  The bill was strongly supported by both the Maine Society of Certified Public Accountants and the Maine State Chamber of Commerce.  It will be effective on July 1, 2012.

 

This Act eliminates Maine Revenue Services’ (“MRS’”) existing appeals office which reports to the State Tax Assessor and replaces it with an Independent Appeals Office, led by a Chief Appeals Officer who will be hired by the Commissioner of Administrative and Financial Services.  The Chief Appeals Officer will be required to exercise independent judgment when ruling on an appeal.  To help maintain this independence, the Chief Appeals Officer and any subordinate appeals officers will not be permitted to have any ex parte communications with either MRS or the taxpayer.  Appellate decisions will no longer require approvals of the division that issued the assessment and other Maine Revenue officials before being issued.  Another change is the creation of a 90 day period beginning when a taxpayer files a request for reconsideration (the appeal) before the Independent Appeals Office will consider the request.  During this time, the MRS division that issued the assessment and the taxpayer are encouraged to resolve issues the taxpayer has raised through informal discussion and settlement negotiations. 

 

LD 1371 also creates the office of the Maine Taxpayer Advocate, who will be selected by the Commissioner of Administrative and Financial Services and who will have the authority to help taxpayers with problems they may have with Maine Revenue Services.  The Advocate is empowered to investigate taxpayer complaints and make recommendations to the State Tax Assessor with respect to those complaints.  The Advocate is also required to submit an annual report to the Governor and Legislature concerning any systemic problems Maine Revenue Services may have in dealing with taxpayers.

 

LD 1371 was sponsored by Representative L. Gary Knight, co-chair of the Maine Legislature’s Committee on Taxation. 

 

For more information about this new legislation, please contact:

 

Jonathan Block           jblock@pierceatwood.com

 

Robert Creamer           rcreamer@pierceatwood.com

 

Sarah Beard                sbeard@pierceatwood.com

Governor LePage’s Supplemental Budget Contains Several Tax Provisions

Governor LePage’s Supplemental Budget Contains Several Tax Provisions

The supplemental budget recently proposed by Governor LePage for the fiscal year ending June 3, 2011 contains a number of changes to Maine’s tax statutes.  These changes are primarily procedural and do not affect Maine tax rates.

As expected, the proposed budget would conform Maine’s income tax statutes to the U.S. Internal Revenue Code as amended through December 31, 2010.

Another change is increasing the time that a taxpayer has for filing an amended Maine return after a federal change affecting the taxpayer’s Maine tax liability.  Instead of the current 90 days, taxpayers would be given 180 days to file an amended return.  The budget also clarifies when this time period commences.

The time period for responding to requests for information from Maine Revenue Services, after which an estimated assessment will be issued, would be extended from 30 days to 60 days.

Finally, taxpayers would be allowed to apply for a refund within three years of when they had incorrectly paid or overpaid a tax, instead of the current two years.  The three year period for requesting a refund from the date when a return was filed remains unchanged.

The supplemental budget will now be considered by the Legislature.  We will be monitoring the process for additional changes that may affect taxpayers.

Amnesties, Tax Reform Update, Credits and Other Recent Tax Developments

Two Limited Tax Amnesties To Be Available In 2010

The budget approved by the Legislature this Spring includes a pair of partial tax “amnesties,” referred to as the 2010 Tax Receivables Reduction Initiatives.  The first is the “short-term initiative,” available for assessments made as of December 31, 2009.  The second, which has more generous terms, is called the “5-year initiative,” and is available for assessments made as of June 30, 2005.  

Taxpayers who qualify for the short-term initiative may apply for a waiver of  95% of the penalties they have been assessed.  Those who qualify for the 5-year initiative, however, may apply for a waiver of 95% of both penalties plus the interest due.   

Applications for both initiatives must be filed with Maine Revenue Services between September 1, 2010 and November 30, 2010.  Participation in the initiatives requires a taxpayer to forgo any appeal of the taxes at issue, and the initiatives are not available for any taxpayer charged with a criminal violation of Maine’s tax laws.  Participants must pay all tax, penalties and interest due under the initiatives by November 30, 2010. 

Tax Reform Implementation Delayed

The Legislature has acted to address potential problems that will be created if last year’s tax reform package (which would have expanded Maine’s sales tax base to cover many services and reduced the top income tax rate to 6.5%) is approved by voters in the June election.  Originally, the majority of the tax reform package was intended take effect on January 1, 2010, so that the reduction in the income tax rate would have been offset by the simultaneous increase in the amount of sales tax collected, with no net loss of revenue to the State.  As most Maine residents are aware, the successful People’s Veto of the reform package means it must now be approved by voters before it can take effect. 

If the voters do approve the tax reform package it is uncertain as to whether the changes it contains could still be synchronized to avoid a loss in revenue.  Although both the income tax reduction and the sales tax expansion could theoretically be applied retroactively to January 1, 2010, it is unrealistic to expect service providers to collect sales tax on services they sold months before.  Alternatively, if both the income tax and sales tax changes were put in place at the same time after the June election, this would mean that most Maine taxpayers would be subject to two different income tax rates during 2010 (the rate at which they currently pay and the 6.5% rate after the June election).

To avoid these outcomes, the Legislature has enacted L.D. 1830 to delay the implementation of all parts of the tax reform package by one year.  This means most parts of the tax reform package (assuming it is approved) will take effect some time in 2011.  A few changes that were originally set to take place in the latter half of 2009, however, such as the increase in the sales tax rate on the short-term rental of automobiles, will take place on corresponding dates in 2010. 

The text of L.D. 1830 can be viewed at:  http://www.mainelegislature.org/legis/bills/display_ps.asp?ld=1830&PID=1456&snum=124

Upcoming Review of Tax Expenditures

The Commissioner of Administrative and Financial Services will be convening a working group to review all tax expenditure programs.  This potentially encompasses most programs and tax structures designed to bring jobs and businesses into Maine.  This review will attempt to generate data on, among other things, revenue loss versus economic gain, jobs created or lost and administrative burdens.  The Commissioner must submit a report to the Legislature on the group’s findings and recommendations no later than November 3, 2010.  

This working group will not contain any representatives from Maine’s business community.  Instead, the group will consist solely of representatives from several executive branch agencies, including:  (1) the Department of Administrative and Financial Services; (2) Maine Revenue Services; (3) the Department of Economic and Community Development; and (4) the State Planning Office.

Change to Sales Factor Formula
 
Companies doing business in Maine and other states should be aware that the sales factor formula which they must use to apportion their income to Maine (contained in 36 M.R.S.A. § 5211(14)), has been amended.  The new version treats all members of a company’s unitary group, including those with no nexus to Maine, as one entity.  This means that when a company is apportioning its sales to Maine it must:  (1) include sales by non-Maine nexus members of the company’s unitary group when calculating both its total Maine sales and total sales everywhere; but (2) exclude sales shipped by the company to jurisdictions where the company is not taxable, unless a member of the company’s unitary group is taxable in that jurisdiction.  (Requiring apportionment to be made in this manner is commonly called the “Finnigan” approach, named for the California State Board of Equalization decision that first adopted it.  See Appeal of Finnigan, Cal. State Bd. of Equaliz., Aug. 25, 1988, Dkt. No. 88-SBE-022.)

Sales And Use Tax Exemption For Watercraft    

Effective August 1, 2010, the existing sales tax exemption for watercraft sold to nonresidents, 36 M.R.S.A. § 1760(25), will be repealed.  Taking its place will be a new version that retains the exemption for watercraft or materials used in watercraft that are sold to a nonresident and removed from Maine within 30 days of delivery by the seller.  In addition, under the new version watercraft that are present in Maine for more than 30 days during the first twelve months after their purchase will be only subject to use tax on 40% of their purchase price.    

Media Production Credit And Reimbursement

The statutes governing the media production certification and tax credit/reimbursement program have been revised to broaden the application of the program, change the basis on which the credit is calculated and modify what wages are eligible for reimbursement.  These changes only apply to certificates issued on or after January 1, 2010.  Companies issued certificates prior to that date are governed by the law in effect when their certificate was issued.   

A description of the changes to the media production credit and reimbursement program can be viewed at:  http://www.mainelegislature.org/legis/bills/display_ps.asp?snum=124&paper=HP1005&PID=1456.

Superior Court Allows Assessor To Disregard Corporate Entities

In a case with implications for many small businesses owners, the Maine Superior Court has allowed the State Tax Assessor to disregard individual taxpayers’ corporate business entities and thus impose tax on individuals for income earned by their entities.    

The case involved attorneys living and working in New Hampshire who each formed a professional corporation (“PC”), of which they were the sole shareholder, and those PCs then became partners in a Maine law firm.  The taxpayers worked as the employees of their PCs, performing almost all of their work in New Hampshire.  The PCs, as partners in the Maine firm, received all partnership distributions, but paid out almost all of what they received as wages to the attorney shareholder/employees, and thus had little or no taxable income.  The attorney shareholder/employees, who were New Hampshire resident employees, were not subject to Maine income tax.   

The State Tax Assessor took the position that he could disregard the PCs and treat the distributions paid by the Maine law firm to the PCs as if they had been paid directly to the attorney shareholder/employees.  This would allow the Assessor to assess Maine income tax against the attorney shareholder/employees on the basis that they had received income from a source within Maine.  The attorney shareholder/employees argued that their PCs had to be respected for tax purposes under the test adopted by the U.S. Supreme Court, but the Maine Superior Court agreed with the Assessor and ruled that the attorney shareholder/employees were subject to Maine income tax on the distributions paid out by the Maine law firm. 

Daniel P. Luker, et. al. v. State Tax Assessor, Business and Consumer Docket, No. BCD-WB-AP-09-32 (January 22, 2010).  The Court’s decision can be found at:  http://www.cleaves.org/bcd.htm#LUK. 

This case has been appealed to the Maine Supreme Court. 

For more information on any of these issues, please contact Rob Creamer at rcreamer@pierceatwood.com

Update on Maine Aircraft Use Tax Challenge

The Maine Supreme Court is now considering two cases challenging the State's ability to impose use tax on aircraft that fit within certain exemptions to the Maine sales and use tax law.  The aircraft at issue were generally owned by nonresidents, were purchased and delivered outside of Maine, spent most of their time outside of Maine, and were not registered in Maine. The aircraft owners argue that these exemptions prevent their aircraft from being subjected to Maine use tax while the State contends that these exemptions should apply only to aircraft purchased in Maine and subsequently removed from the State.  One of the cases presents an additional issue applicable to leased aircraft and yachts.  The cases have been fully briefed, and we are awaiting oral argument to be scheduled before the Maine Supreme Court.  A decision is expected in late 2010 or early 2011.  Many other cases involving aircraft assessments are on hold pending the outcome of these decisions.  

If you are concerned about Maine sales and use tax liability on aircraft, yachts or boats, please contact us.

Jon Block

Major Changes to Maine's Sales Tax Law will Affect Many Service Providers and Lessors

Maine has recently enacted a major piece of tax reform legislation, P.L. 2009, c. 382, ("Chapter 382") which creates a flat 6.5% income tax for most taxpayers, in an effort designed to reduce the tax burden on most Maine residents.  To make up for this reduction in income tax, however,  Chapter 382 greatly expands Maine's sales tax base by taxing many services that have traditionally been tax free and radically changing the tax treatment of certain transactions, such as leases and rentals.

Newly Taxed Services

The newly taxed services fall into four main categories:

1.    Amusement, entertainment and recreation services, which includes a wide range of activities, such as:

• Admission to "entertainment venues and performances," such as theaters, concerts, festivals, amusement parks, race tracks, animal parks, historical sites and sports activities;
• Entry into billiard parlors, miniature golf courses, and "exhibition shows" such as boat, camping and home and garden shows;
• Sight-seeing tours, including helicopter, boat and wagon rides, as well as rafting and guided recreation; and
• Entertainment services, such as those provided by jugglers, clowns, comedians and children's entertainers.

2.    Installation, repair and maintenance services, which includes:

• Services involved in the installation, repair or maintenance of many items such as jewelry, cameras, guns, electronic and mechanical equipment, computer hardware, lawn and garden equipment, and vehicles;
• Tailoring and shoe repair; and
• Furniture repair and restoration.

3.    Personal property services, which include:

• Dry cleaning;

• Car washing;

• Many types of pet services;

• Picture framing;

• Domestic services including house and rug cleaning;

• Storage services; and

• Vehicle towing and boat mooring.

4.   Transportation and Courier Services, which encompasses the in-state transportion of persons or property by limousine or courier services.

Many of these terms will need to be defined before taxpayers can know exactly which services are taxable.  For example, it is unclear what type of gathering constitutes a "festival," or what types of devices are "electronic and mechanical equipment," or even whether a bar with a pool table would be charging for entry into a "billiard parlor" if it required a cover charge.  We recommend that any businesses or individuals who are unsure of whether their activities constitute taxable services contact us for assistance with obtaining guidance from Maine Revenue Services to either confirm that they do not need to collect sales tax or avoid liability for failing to do so.

Treatment of Leasing and Renting as a Taxable Service

Chapter 382 also makes the leasing or renting of tangible personal property a taxable service, and the lessee or rentee is liable for the tax, which must be collected by the lessor or rentor at the time the rented property is delivered or when the first payment is required, whichever is sooner.  The amount of tax due is calculated using the total amount of payments that will be made under the lease agreement and, as noted, is payable up-front at the beginning of the lease, and not as rents are collected.  If the lease is open-ended, the tax is based on the total amount to be collected during the initial, fixed term of the lease, and then tax must also be collected later for each subsequent renewal period.

Certain sale and leaseback transactions may be exempt  from this treatment, as well as the leasing of equipment located at fabrication and manufacturing facilities.  A portion of the tax may be refundable for leased property that leaves the State before the expiration of the lease.  Please contact us for more information on whether your leasing or renting activities may be tax-exempt, or, if not, how you should be collecting and remitting tax on those activities.

For more information, please contact:

Robert A. Creamer, 207-791-1322, rcreamer@pierceatwood.com

Jonathan A. Block, 207-791-1173, jblock@pierceatwood.com

Sarah H. Beard, 207-791-1378, sbeard@pierceatwood.com

 

Time to Pay Past Due Maine Tax Debts?

Between September 1, 2009 and November 30, 2009, Maine Revenue Services will be running a "tax receivables reduction" initiative.  Under this initative, taxpayers who come forward and pay past Maine state tax debts will receive an abatement of 90% of the penalties assessed against them.  This program applies to mosttaxpayers (businesses and individuals), all state-level taxes, and even applies to taxpayers who are currently appealing their assessments.  A taxpayer's decision to participate in this program should be made carefully and in consultation with atax advisor.

Maine Revenue Services also seems to be offering taxpayers the same or similar terms right now -- in advance of the official start of the program. 

For additional information about this program, and whether or not to take advantage of it, please contact us.

Jon Block

Maine Pine Tree Zone Program Expanded to Cover All Areas of the State for a Limited Time

By Jonathan A. Block

If your businesses is starting up, expanding in Maine or relocating to Maine, you should be aware that Maine's Pine Tree Zone program has just been expanded to include all areas of the State for a limited time. Previously, the program was limited to certain specified zones. The program has been expanded in other ways as well. Among the specific changes that were made in the recent legislation:

Until December 31, 2009, ALL areas of the State are Pine Tree Zones and eligible businesses locating anywhere in the State will be entitled to full, 10-year Pine Tree Zone benefits. (Previously, the progam was limited to certain economically challenged areas and was not available in most parts of Cumberland and York counties.)

Beginning January 1, 2010, eligible businesses locating in Cumberland or York Counties will be eligible for Pine Tree Zone benefits, but on a reduced scale (5 years instead of 10 years), except that certain areas of high unemployment within Cumberland and York Counties will continue to be eligible for full 10-year Pine Tree Zone benefits.

In addition, some of the restrictions and limitations in the old Pine Tree Zone program have now been relaxed or eliminated.

Eligible businesses are still limited to manufacturers, certain "targeted technology" businesses, and financial services.

The benefits of a Pine Tree Zone include: Full or partial Maine income tax holiday for up to 10 years; no sales tax on construction materials or purchases of equipment; and more generous employee-tax increment financing benefits.

Our State and Local Tax Group regularly advises clients on Pine Tree Zone applications. Please let us know if you have questions about the Pine Tree Zone program.

Beverage Tax Repealed by People's Veto

The headline says it all.  The beverage tax enacted by the Legislature last session has been repealed by a successful people's veto effort.  The tax had been intended to provide a new funding mechanism for the Dirigo Health program.

Jon Block