CCH can assist you with stories, including interviews with CCH subject experts. Also, the 2005 CCH Whole Ball of Tax is available in print. Please contact:
 
Leslie Bonacum
(847) 267-7153
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Neil Allen
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Link to special CCH Tax Briefings on key topics from 2004:
 

• American Jobs Creation Act
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• Working Families Tax Relief Act
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While Uncle Sam Hands Out Tax Cuts, CCH Finds States May Not be as Generous

(RIVERWOODS, ILL., January 2005) – While many individual taxpayers and manufacturers may be looking forward to owing less in federal taxes thanks to provisions in the American Jobs Creation Act of 2004 (AJCA), not all states may be as generous in allowing the benefits for state income tax purposes, according to CCH INCORPORATED (CCH), a leading provider of tax and accounting information, software and services (tax.cchgroup.com).

"Beginning with federal tax cuts made in 2001, states have increasingly decoupled their systems to keep their revenues from falling further. This trend is likely to continue as we begin to see states decoupling from the federal rules when it comes to the new federal deduction for manufacturers and the sales tax deduction for individual taxpayers that were part of 2004 legislation," said John Logan, JD, CCH senior state tax analyst.

One reason many states continue to put their foot down when it comes to federal tax breaks being applied locally is that while the federal government can operate with a deepening deficit, almost all states are constitutionally bound to balance their budgets.

"Individual income tax receipts are one of the most important revenue sources for states, and any tax deduction at the federal level that is allowed to be carried over into a state means less tax revenue for that state," said Logan. "While states overall are financially better off than they have been in a few years, that doesn’t mean they’ll all be willing to adopt this tax cut at the state level."

States also made additional strides in 2004 to streamline their sales taxes, getting them closer to being able to require more companies to collect use taxes from customers.

On the corporate side, states will begin evaluating in their next legislative sessions whether or not they want to decouple from federal income tax law allowing domestic manufacturers a 3-percentage point tax break for 2005, increasing to 9 percent in 2010. The deduction, which is estimated to cost about $76 billion federally, is the most expensive provision of the AJCA and also would be costly to states conforming to federal tax law. The federal law also broadly defines manufacturers to include several areas outside of traditional manufacturing as well as the underlying "production activities" associated with manufacturing. (For more on applicable manufacturers see CCH’s Special Tax Briefing on the AJCA at http://tax.cchgroup.com/Tax-Briefings).

"This will be a big revenue loss, but any move to undo this federal break on the state side would put the state at a competitive disadvantage when it comes to attracting and retaining manufacturers," said Logan. He noted that the states have been competing fiercely for the last few years to offer corporate tax breaks that have tended to minimize the corporate income tax in an effort to bring more companies and jobs to their states.

On the personal income tax side, every taxpayer who gets a Form 1040 tax package from the IRS this year also will receive Publication 600, Optional State Sales Tax Tables, which taxpayers may use for their 2004 federal returns. States, however, have to decide whether to go with Uncle Sam on the new federal deduction for state sales tax. This law, in effect for 2004 and 2005, lets individuals choose to deduct their state sales tax rather than their state and local income tax on their federal tax return. On the federal level, the sales tax deduction is available not just to individuals living in states without a personal income tax (for example, Texas or Florida), but also to anyone in other states who find their sales tax liability is greater than their state income tax liability, for example, because they bought a single big-ticket item or a series of items.

States already are reacting differently to this provision. For taxpayers in states without an income tax, there is not an issue. Nor is it an issue in states such as Illinois or Ohio that base their state income tax on federal adjusted gross income (FAGI) where federal itemized deductions are not factored into computations for arriving at state income tax owed.

However, some states have taxpayers determine state taxes starting with federal taxable income, which includes federal itemized deductions in the figure used to compute state taxes.

Both Colorado and North Carolina are among the states using federal taxable income. North Carolina already has ruled that its current provision, which requires that any state income taxes deducted for federal purposes be added back in, also applies to the federal sales tax deduction, thereby requiring its taxpayers to add the deduction when computing how much they owe in state taxes.

"There’s a lot left to interpretation and the states are looking at how much they stand to lose if they continue to follow suit with the federal tax law," said Logan.

As Internet and mail-order retailers had another strong year, states continued their focus on their mounting losses of uncollected use taxes as individuals purchase goods from these retailers without paying taxes. This loss has been estimated at over $13 billion for 2001 alone, and is projected at nearly $440 billion for the period 2001 through 2011.

The major sticking point has continued to be the exceedingly complex web of state, county and local sales tax rates and rules that, according to the U.S. Supreme Court, make it onerous for retailers without a physical presence to keep up to date with and to collect use tax from customers in all these jurisdictions.

However, states are making a concerted effort to change that: The number of states now part of the Streamlined Sales Tax Project (SSTP) is 42, and 19 have passed conforming legislation to simplify their sales tax laws to conform to an interstate model. SSTP, composed of representatives of over 40 states working with the business community, has developed measures to design, test and implement a system that simplifies sales and use tax collection and administration by retailers and states.

Additionally, under the Streamlined Sales Tax Agreement all participating states will begin to apply the same sourcing rules. Under this agreement, the sales tax of the destination (not the point of sale) will apply to all sales. Participating states will be moving to the new model over the next few years, with 19 states already having committed to doing so in the next two years.

Among those states that will have destination-based sales tax sourcing rules in effect during 2005 are Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, North Carolina, Ohio, Oklahoma, South Dakota, Tennessee, Utah, West Virginia and Wyoming. Additionally, both Arkansas and Vermont currently are slated to adopt destination-based sales tax in 2005; however, there is a contingency in the implementing provisions in those two states that may delay this. Those slated to adopt destination sourcing rules starting January 1, 2006, are Nevada and North Dakota; however, legislation has been introduced in North Dakota to move that date up to October 1, 2005.

"With destination-based sales tax in place, states will be in a far better position to lobby Congress to allow them to require sellers to collect sales tax from buyers when they have no physical presence in the state," explained Logan. "Technically this would not increase the tax burden on individuals as use tax is a tax that they already were supposed to be paying either at the time of purchase or by declaring it on their income tax return."

CCH INCORPORATED (tax.cchgroup.com), based in Riverwoods, Ill., is a leading provider of tax and accounting information, software and services. CCH has served tax, accounting and business professionals and their clients since 1913, providing them with the most authoritative, timely and comprehensive tax resources. CCH is a Wolters Kluwer company (www.wolterskluwer.com).

Wolters Kluwer is a leading multinational publisher and information services company. The company’s core markets are spread across the health, tax, accounting, corporate, financial services, legal and regulatory, and education sectors. Wolters Kluwer has annual revenues (2003) of €3.4 billion, employs approximately 18,750 people worldwide and maintains operations across Europe, North America and Asia Pacific. Wolters Kluwer is headquartered in Amsterdam, the Netherlands. Its depositary receipts of shares are quoted on the Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices.

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nb-05-07