Indiana enacts significant tax law changes, falls short of complete reform
TAX ALERT |
In early May, Indiana Gov. Mike Pence signed multiple pieces of legislation that have significantly revised numerous Indiana tax laws. These bills include:
- HB 1472 – Signed May 6, 2015
- SB 441 – Signed May 6, 2015
- SB 436 – Signed May 6, 2015
- HB 1001 – Signed May 7, 2015
The changes implemented by these bills are outlined below:
Tax amnesty program
HB 1001, Section 91, requires the Indiana Department of Revenue (DOR) to establish a tax amnesty program for taxpayers having an unpaid tax liability for a tax period ending before Jan. 1, 2013.
A taxpayer that participates in the program and fully complies with its terms will be granted a waiver of all penalties, interest, collection fees and other costs that would otherwise be due. Additionally, the DOR will release any liens imposed, refrain from seeking civil or criminal prosecution of the taxpayer, and refrain from issuing, or withdraw if already issued, any assessment, demand notice or warrant for payment against the taxpayer for covered taxes.
The dates for the amnesty program have not yet been set. However, the amnesty program will be limited to an eight-week period ending no later than Jan. 1, 2017.
The following income tax changes are generally effective for tax years beginning on or after Dec. 31, 2015, unless otherwise noted:
- Repeal of the throwback rule: Currently, taxpayers that ship tangible personal property from Indiana to a purchaser located in a state where the taxpayer is not subject to tax are required to "throw back" such sales for purposes of computing the Indiana apportionment factor numerator. Under SB 441, Section 14, this throwback rule is repealed, which could provide a substantial benefit for taxpayers shipping goods from Indiana into other states.
- Definition of business income: Pursuant to SB 441, Section 13, the state has broadened its definition of business income to include all income that is apportionable to the state under the Constitution of the United States. This change is similar to changes that have been made in many other states in recent years. This change makes it much more difficult to treat the gains from a given transaction (i.e., sale of business) as non-business income and allocate those gains to one state.
- Apportionment treatment of computer software: SB 441, Section 14, specifies that computer software sales by business taxpayers will be treated as sales of tangible personal property for purposes of the state's apportionment sales factor.
- Broadening of intercompany expense addbacks: SB 441, Section 24, broadens the current law related to the addback of intercompany interest expenses that are deducted on a corporate taxpayer's federal income tax return. The revised law expands the addback to include all intercompany interest in circumstances where the interest recipient originally loaned the funds to the taxpayer out of amounts received from the taxpayer, and affiliate, or a foreign corporation. Previously, the addback for intercompany interest was limited to interest paid on loans originally funded through intercompany intangible payments.
- Conformity with the Internal Revenue Code (IRC): HB 1472, Section 15, revises Indiana's conformity to the IRC as it existed on Jan. 1, 2015.
- Venture Capital Investment (VCI) credit: SB 441, Section 30, extends the VCI credit's sunset provision to allow investment credits to be awarded for qualifying investments made before Jan. 1, 2021.
The bills make a variety of sales and use tax changes, including:
- Agricultural exemption expansion: Effective Jan. 1, 2016, SB 441, Sections 9 and 11, amend the agricultural exemption to include material handling equipment purchased for the purpose of transporting materials into a person's direct use in the direct production, harvesting or processing of agricultural commodities from an onsite location.
- Manufacturing exemption expansion: Effective Jan. 1, 2016, SB 441, Sections 10 and 11, amend the manufacturing exemption to include material handling equipment purchased for the purpose of transporting materials into a person's direct use in the direct production, manufacture, fabrication, assembly, extraction, mining, processing, refining, or finishing of other tangible personal property from an onsite location. Additionally, the exemption is amended to also include the cutting of steel bars into billets and the felling of trees for further use in production or for sale in the ordinary course of business into the definition of processing tangible personal property.
- Temporary storage: Pursuant to HB 1472, Section 6, effective Jan. 1, 2016, property stored within Indiana for 180 days or less for the purpose of being used solely outside Indiana is not subject to Indiana use tax. This current provision does not include the 180-day requirement.
- Refund claim limitation repealed: Pursuant to HB 1472, Section 7, effective July 1, 2015, the 36-month limitation on filing refund claims based on the electrical energy, artificial or natural gas, water, steam and steam heat exemptions is repealed. Therefore, on and after July 1, 2015, manufacturers may file refund claims on utilities using the standard statute of limitations.
- Medical equipment, supplies and devices: Pursuant to HB 1472, Section 8, effective July 1, 2015, the exemption for medical equipment and supplies is expanded to include durable medical equipment, mobility enhancing equipment, and prosthetic devices, as well as any applicable repair and replacement parts.
- Research and development: Pursuant to HB 1472, Section 11, effective Jan. 1, 2016, research and development (R&D) activities, for purposes of the R&D sales tax exemption, include the design, refinement and testing of prototypes of new or improved commercial products before sales have begun for the purpose of determining facts, theories or principles, or for the purpose of increasing scientific knowledge that may lead to new or enhanced products.
For purposes of the exemption, R&D activity is devoted to experimental or laboratory research and development if the activity is considered essential and integral to such experimental or laboratory R&D. The term does not include activities incidental to experimental or laboratory R&D.
Added to the list of what is not R&D is research in connection with nontechnical activities, including social sciences, economics, humanities or psychology; market and sales research; product market testing; the acquisition, investigation, or evaluation of another's patent, model, process or product to investigate or evaluating the value of a potential investment; the providing of sales services or any other service, whether technical or nontechnical in nature; or activities incidental to experimental or laboratory R&D, such as heating, cooling or illuminating office buildings, capital improvements to real property, janitorial services, personnel services, inventory control services, management services, marketing, training, accounting, or any other and personnel services.
- Recycling exemption: Pursuant to HB 1472, Section 12, effective July 1, 2015, the exemption for recycling machinery, tools and equipment has been replaced with an exemption for tangible personal property if the person acquiring the property: (1) acquires it for the person's direct use in processing recycling materials, and (2) is occupationally engaged in the business of recycling. Recycling carts, meaning manually propelled containers with a 100-gallon or less capacity, are specifically exempt.
- Certificate revocation: Pursuant to HB 1472, Section 13, effective July 1, 2015, the DOR may revoke a retail merchant's certificate if the retailer fails to file a return or remit tax. The DOR may revoke a certificate before a criminal adjudication or without a criminal charge being filed.
- Sales of power: Pursuant to HB 1472, Section 14, effective July 1, 2015, a power subsidiary or a person selling electrical energy, natural or artificial gas, water, steam or steam heating service that accepts a sales and use tax exemption certificate is not required to collect sales or use tax on the sale of the services or commodities until notified by the DOR that the exemption certificate has expired or has been revoked. An exemption certificate issued by the DOR remains valid regardless of subsequent one for one meter number changes that are required, made or initiated by a power subsidiary or person selling electrical energy, natural or artificial gas, water, steam or steam heating service.
SB 436, Section 3, provides a personal property tax exemption for taxpayers with less than $20,000 of total business personal property in a county. This exemption is effective for assessments occurring after Dec. 31, 2015, and, unlike in prior law, there is no requirement for the exemption to be adopted by the county.
This package of bills has a broad impact across Indiana's business tax structure. Businesses that are subject to Indiana income, sales and use, or property tax should review these changes to determine whether they will result in an overall reduction in cash taxes and require a change in deferreds for financial statement purposes.