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

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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.