Conference: Public Comments
All Hoosiers and interested individuals are encouraged to give suggestions of ways to simplify Indiana’s tax code and make Indiana a more competitive state for business and jobs. Below is the public discussion based on submitted comments, recommendations and suggestions.
To view comments by topic, click on the categories below.
- Individual income tax
- Tax competitiveness
- Corporate tax
- Local tax
- Sales and use tax
- Tax simplification
To submit your suggestions, click here.
David McDaniel, CPA
Chair, Indiana CPA Society Tax Resource Advisory Council (TRAC)
August 20, 2014
We appreciate the opportunity to join the open discussion amongst professionals and the public with varied perspectives and expertise. Our goal is to focus attention on making Indiana better through tax simplification and competitiveness positioning. We look forward to being a part of something that benefits every taxpayer in Indiana.
A few summarized thoughts for consideration:
Individual tax forms - too many - too complex - recent modifications to the forms lengthened the required forms and added several supplemental schedules for all returns. It is one of the longest state tax forms - adds to complexity and compliance issues.
Individual instructions too long - Individual instructions are over 60 pages - too long – it adds to complexity and compliance issues.
Nonresident shareholder withholding/Composite returns – One of the most complex states to file - almost every other state has an easier processing. This was first a payroll withholding form that required
INTax registration and now can be a separate new controlled tax form. There are options on how to file which is confusing. Other states generally handle this as a business entity level tax. This process is the biggest complaint from state tax preparers. This needs legislative attention to be moved out of the payroll tax section of the Indiana tax code.
Taxpayer account information with dates and type of payment made available online - the information now available is only the payment amount with no date or type of payment listed. Estimated tax matters are one of the largest causes of Indiana income tax notices to individuals. Better information available would improve the accuracy of returns being filed by taxpayers.
Online payment options – the ability to schedule tax payments for April 15 and estimated payments online would be a valuable option for taxpayers to schedule their payments and not jeopardize compliance.
Credit reform - Review all Indiana credits - some are not utilized because they are very limited in nature, too difficult (or costly) to qualify for, or are actually too large to be an incentive since they only offset
Indiana tax and are not refundable. Consider smaller, easier-to-qualify-for refundable credits as incentives.
Deductions, exemptions or credits for incentives - Several other states have adopted income deductions, exemptions or credits for targeted business (small, manufacturing, etc.) for tax incentives.
This is worth considering for Indiana.
Too many items decoupled from Internal Revenue Code – This greatly adds to the complexity of Indiana tax and creates annual differences with federal tax for items such as depreciation (Section 179 and Bonus depreciation). Add back for non-Indiana municipal bond interest after 2011 is nearly impossible to calculate and unrealistic for Indiana to expect taxpayers to comply.
Fraud filters – Direct communication with taxpayer to prove identity is the best way to proactively deal with this issue. Holding refunds of taxpayers (usually over $1,000) affects taxpayers that file legitimate returns with refunds and harms taxpayers that do not know to call about the status of their refund. Identity theft and fraudulent returns will continue to be a significant matter in the future.
Indiana Section 529 tax credit - Great program. Confirmation of contribution before return is processed with a third party is unusual and often a burden to taxpayers.
Indiana College Credit - Good program - amount has not changed in years - increase contribution level and/or change the credit amount.
Indiana Flat Tax Rate – Easy to calculate and manage since it is a flat tax and Indiana withholding on wages is usually not a problem. However withholding on pensions and annuities is sometimes an issue.
County Taxes – Can be confusing. January 1 date sometimes hard to manage for taxpayers – individuals forget to change county with employer or on their tax return. Wrong county withholding often by employers and out of state employers many times will not withhold county tax at all. That causes taxpayer to owe tax with return that they were not expecting.
Nexus – Situation becoming more frequent – individual telecommuting for out of state employer at home office in Indiana where the company does not have another economic nexus. Guidance and cooperation between states would be helpful.
Overall, the state would benefit from simplifying individual tax, providing electronic filing of business returns, eliminating business property tax, and not creating more complexity by having a sales tax on services.
These comments are submitted by the Tax Resource Advisory Council of the Indiana CPA Society. However, the comments have no official status and do not represent either the approval or the disapproval of the Society or its Board of Directors.
Dr. Jim Wolfe
Governor Pence has called in people who are likely to give bad advice. There is no validity to Lafferâ€™s supply-side economics. Norquistseeks only to reduce taxes. Yet a sufficient level of taxation is necessary to provide adequate services, and businesses have an easier time recruiting employees in a tolerant and generous state. Governor Pence would be well advised to expand Medicaid under the AffordableCare Act, largely financed with federal funds, thereby reducing some of the the hardships of the relatively poor.
Could Indiana create a culture equipped with a powerful private sector mechanism to solve challenging social problems, (child hunger, homelessness or tornados) that Hoosiers could look to before they look to government to solve these problems.
Imagine combining three concepts:
- Bill Gates™ concept of Creative Capitalism where businesses donate what they do best as in-kind contributions at their marginal cost. Say 70%.
- For this they receive a Federal deduction at fair market value. Saving taxes of say (33%)
- Coupled with a new State of Indiana Tax Credit pilot program. Saving say 25%. Resulting in a net cost to the Hoosier businesses who contribute to the needs of others of 12%.
What if there was a web-based Philanthropic Exchange that:
- Had a series to tools to collaborate, curate and carefully define the need
- Provide a forum for Not-for-Profit, For-Profit and individuals to come together to carefully curate solutions
- A special pilot program team, created by the State of Indiana, could then decide if it wants to grant a limited amount of tax credits to the solution
- Produce a detailed list of deliverables that Hoosier businesses and individuals could provide
- Provide fundraising campaigns for any cash needs that remain after in-kind gifts are exhausted
- Provide metrics with regard to the effectiveness of the solution
- Provide a forum for constant improvement
- Provide on-going recognition for all contributors
Would this result in:
- A highly responsive, privately driven solution to pressing social needs that Hoosiers care about.
- Unleash the energy of people passionate about a particular social need?
- Bring a ratio of $4.00 of private funding for every $1.00 of State of Indiana credit?
- Relieve the State of Indiana of administrative burden of running new programs?
Outreach to Employers on the Work Opportunity Tax Credit to Increase Employment Opportunities for Populations Who Face Significant Employment Barriers. The Work Opportunity Tax Credit (WOTC) is a Federal tax credit for private sector businesses for hiring individuals from nine target groups who have consistently faced significant barriers to employment.
Smooth Out Cliffs in Childcare At the same time that low-income Hoosiers are burdened by paying the highest effective tax rates, they also pay some of the highest effective marginal tax rates creating This occurs when a small increase in income leads to a large loss of public resources also known as the cliff effect phenomenon. At a wage of $8 per hour, a single mother with one preschool age child and one school age child, with the support offederal and state tax credits, SNAP, public health insurance, and a child care subsidy is self-sufficient. The first significant loss innet resources occurs when the participant loses SNAP benefits between the wages of $11.50 and $12.00 per hour a total annual net resource loss of $2651 nearly 11 percent of annual income. Most dramatically though is the cliff that occurs as child care subsidies are lost between the wages of $15.00 and $15.50 per hour a total net resource loss of $8,454 a painful 25 percent loss in annual resources as a result of a $0.50 raise. The unintended consequence of this designeither leads to a disincentive towards economic mobility, or leads to a situation in which the parent or guardian is working harder, but is financially worse off effectively trapping families into poverty. By smoothing out the benefit cliff, policymakers could begin restore a system that rewards hard work.
Tim Rushenberg (Indiana Manufacturers Association)
- Repeal the 30 percent minimum valuation floor on personal property: Indiana is the only state to apply two minimum valuation floors one in each of the asset depreciation pools and the 30 percent floor. The 30 percent floor is a problem for Hoosier manufacturers for several reasons:
- 30 percent is an arbitrary figure that takes away depreciation otherwise granted in the deprecation pools.
- Frustrates economic development by artificially inflating the taxable value of business personal property.
- Over-burdens older industries that keep machinery and equipment active for several years beyond their life expectancy, such as foundries and primary metal manufacturers.
- Diminishes the effects of otherwise permitted deductions under the law.
A responsible manner in which to repeal the 30 percent floor and its estimated $145 M tax cap loss to local governments is to apply the 30percent floor's elimination to newly acquired property, which will have the effect of phasing-in the fiscal impact over a period of years as opposed to affecting local units’ budgets immediately.
- Refine County Property Tax Assessment Board of Appeals (PTABOA)subpoena authority: County PTABOAs increasingly have been issuing subpoenas against commercial and industrial taxpayers in property tax appeals, requesting numerous documents and compelling the presence of witnesses. The volume of documents requested and the manner in which some PTABOAs are using subpoenas suggests they are being used as a tool to dissuade taxpayers from pursuing appeals (by imposing significant discovery-related costs).
Without eliminating the PTABOA subpoena power entirely, legislation should be proposed that accomplishes the following:
- if a taxpayer does not comply with a PTABOA subpoena, allow the PTABOA to make a ruling without regard to the evidence submitted by the taxpayers;
- prohibit the PTABOA from taking action to enforce its subpoena;
- retain the existing taxpayer appeal rights, permitting taxpayers to appeal to the Indiana Board of Tax Review (IBTR) where both parties have the discovery tools and can enforce non-compliance;
- prohibit a local assessor from filing an affidavit in county circuit court to enforce its requests for information; and
- repeal the failure to comply with a PTABOA's subpoena from being deemed a class A misdemeanor.
- Conformity with Internal Revenue Code section 199: The Indiana Manufacturers Association supports conformity with IRC 199 for Hoosier-based manufacturers. Additionally, to calculate the Indiana199 deduction, IMA supports basing the deduction on a separate Indiana calculation similar to the Indiana R&D credit calculation.
- Repeal of Throwback Rule on Export Income: IMA supports legislation that will repeal the throwback rule with respect to sales made to buyers outside the U.S. in countries that do not tax such sales income. The throwback rule on exports does not fairly measure a corporation’s business activities in Indiana, and it dampens exports by Hoosier manufacturers. A repeal of the throwback rules on exports will stimulate export sales by Hoosier manufacturers.
Michael A Claytor
June 17, 2014
Commissioner Michael Alley
Indiana Department of Revenue
100 N. Senate Ave., Room 248N
Indianapolis IN 46204
Dear Commissioner Alley:
I appreciate the opportunity that the IDOR has given to Indiana Taxpayers to comment on the tax structure in Indiana in order to provide ideas for tax simplification as part of the Indiana Tax Conference on Competiveness and Simplification on June 24, 2014. There are a number of areas that I feel should be addressed, but I would like to take the opportunity to mention a few matters that I believe the Department should consider as a part of the Conference.
Earlier in my state government and public accounting career, the Indiana tax mix seemed to be more in balance. In looking at what I call the tax balance, the proportion of taxes that comes from Income Tax (what we make), Property Tax (what we own), and Sales Tax (what we buy), Indiana’s mix used to be fairly close to 1/3, 1/3, 1/3 from those three areas when considering state and local taxes together.
With the tax policy changes that have occurred over more recent years, our tax balance has been trending to more reliance on sales tax to where that category now represents almost 40% of combined state and local taxes. As you are aware, sales tax is disproportionally borne by individuals, and is considered a regressive tax. That over-reliance hurts the working poor in a disproportionate manner.
Since, as a part of the Conference you will be looking at the mix of all taxes, any analyses should include both the tax mix by category as well as the impact to groups of taxpayers within each category, particularly business versus individual, but also by discrete groups within those categories. For example, an analysis of business tax impact by agricultural, manufacturing, distribution and other business categories should measure whether the impact of business taxes by category vary from the percentage that those groups represent of the total state GDP.
Please also bear in mind that state taxes cannot be discussed without an analysis of local taxes. State and local government are inextricably linked, and since the state controls the ability of local government to tax, state and local tax policy must be considered together. Every adjustment of state and local tax policy changes the mix of taxes and the impact to taxpayers by category. It is my opinion that a balanced approach to tax mix and impact must be the basis for decision making. However, considering only the state level misses how certain types of businesses or groups of individuals can be negatively impacted by local property or income taxation decisions.
Decoupling of State Income Tax Reporting from Federal Income Tax Reporting Indiana bases income tax reporting from both individuals and corporations on federal income tax reporting. While this can be an efficient manner of administering income taxes, it also subjects Indiana to losses of revenue that rightfully should be coming to the state. A January 2013 study by the US Public Interest Research Group discloses a $39.8 billion loss of income to states from both corporate and individual income tax payers that use foreign tax havens to shelter income from taxation. US PRIG estimates that the annual loss to Indiana due to this issue exceeds $700 million. Decoupling Indiana’s tax reporting system from the federal system could allow Indiana to capture more income tax revenue by closing tax loopholes that allow both corporations and individuals to shelter income from taxation. By coupling to federal income tax reporting, Indiana has given up the right to aggressively pursue legitimate revenue sources.
Corporate Income Tax Rate versus Individual Income Tax Rate The disparity between the corporate income tax rate and the individual income tax rate in Indiana is often referred to when tax fairness is discussed. I would like to focus on two issues in that regard. First, there are a number of factors that do not allow these rates to be comparable, and second, a huge proportion of businesses in Indiana, almost all small businesses, pay their taxes on individual income tax returns as pass-through entities, not as corporate taxpayers. Pass-through entities, as you know include limited liability companies and Subchapter S Corporations, where the owners report the net income on their individual income tax returns.
Corporate and pass-through entities are allowed many more deductions from income to arrive at the amount of adjusted gross income subject to the tax rate. Individuals do not have as many deductions available to arrive at adjusted gross income and therefore, a higher proportion of their income could be subject to taxation, although at a lower tax rate. Therefore, the discussion cannot just be about what the net rate happens to be without a consideration of to what base the rate applies.
In addition, local option income taxes are not applied to corporate taxable income, only to individual taxable income. Therefore, the total state and local tax rate which applies to individuals, not corporations, also applies to pass-through entities. Since there are now a large number of Local Option Income Taxes (LOITs) plus a number of special LOIT rates for certain areas, pass-through entities are taxed at variable rates depending on the county of residence of the owners. Multiple owners of a single pass-through entity pay differing ax rates depending upon where they live. An owner of a pass-through entity can lower their tax rate by moving across a county line. We all seem to acknowledge that businesses demand a consistency in tax rate and application so that they can make long-term development decisions, but we are not giving small businesses a consistent tax structure.
The Indiana General Assembly has adopted income tax rate reductions for both individual and corporate taxpayers which phase in over time. However, when the rate changes currently in the statute are fully phased in, the total tax rate (state and local income taxes) will be higher for individuals than for corporations. A very large proportion of small businesses, the backbone of our economy, are taxed as pass-through entities. Therefore, once the rates fully phase in, our small businesses will be taxed at a higher total income tax rate than regular corporations. I do not believe that is good public policy since small businesses are major job creators in Indiana.
I believe that the portion of individual taxable income that represents true business income should be taxed in the same manner and at the same rate as corporate taxable income. However, implementation of a solution that would meet that goal would require either decoupling of the state individual income tax system, as discussed above, or a revamping of the data systems currently in use by the Department, as discussed below.
Collection and Use of Data
Obviously the Department has been working to improve its systems under your leadership, but there are some areas where a lack of data makes both the type of analysis that I have referred to above difficult, but also makes tax administration difficult as well. Examples are:
Pass-through Entities. Since the Indiana Individual Income Tax Return begins with Federal Adjusted Gross Income, the Department does not capture the information that would provide the data to show what portion of individual income taxes are actually business taxes versus non-business taxes. The Department cannot determine how comparable the corporate versus pass-through entity income tax burden is without being able to distinguish individuals with passive income versus active business income. Without this type of information, there is no way for the General Assembly to truly understand the impact of its tax policy decision making. A policy designed to help or impact investors could unintentionally burden small businesses in Indiana. It is my opinion that the Department should capture the information necessary to determine whether the components of adjusted gross income being taxed are passive or active business income in order to provide the General Assembly the data to aid in its tax policy decision making by providing a true comparison of corporate versus non-corporate business income taxes.
LOIT Collection and Distribution. It is my understanding that employers collect and report information on their employees’ county of residence and the county tax withheld as a part of normal payroll withholding information. However, it is also my understanding that the amount of LOIT reported and distributed to each county is based on information reported by taxpayers on their individual income tax return. As you know, not all individuals either file, or are required to file an income tax return. Therefore, local officials may question the allocation and distribution of LOITs and wonder whether any reconciliations are performed between what employers report and what taxpayers report. Since the Department is a collection agent for local government as well as for the state, local officials should have confidence that all LOITs are properly accounted for and remitted in a timely manner. Inclusion of reconciliation information in the annual Handbook of Taxes, Revenues and Appropriations issued by the Legislative Services Agency would aid in providing full transparency to local leaders and citizens in our state.
I appreciate the opportunity to provide these comments and I hope that your conference goes well. A great deal of my expertise is in Indiana property taxation and tax increment financing, but I have also worked with a number of counties on LOIT implementations and have served other states and many local governments in finance and tax matters. I served on Lt. Governor Kernan’s Tax Restructuring Committee and served as a citizen advisory member of the Local Government Finance Study Commission of the Indiana General Assembly. I would be happy to work with you and your staff on any of these matters. Feel free to call on me.
Very truly yours,
Michael A. Claytor
M Brent Pittman
Tax reform should include the following strategies: Create good paying American jobs with good benefits for American citizens by repealing all sales/consumption taxes & replace the lost revenue with an import tax/tariff on imported labor (India & the Philippines) &manufactured goods (Mexico & Communist China, North Korea & Vietnam).Burn both the federal & state individual income tax codes & give each income receiving American citizen a $50000 standard deduction while keeping current dependent exemptions. Then tax the next $50000 at 2%,the next $50000 at 4%, the next $50000 at 6%, etc. until the federal &state budgets are balanced. Collect impact fees. NO corporate welfare.NO illegal aliens. Increase the minimum wage. Burn USA business & corporate income tax codes & place a "fair tax" (with a standard deduction of $5 Million) on ALL USA business & corporate sales/revenue including foreign after deducting compensation and benefits for American citizens' labor; except for CEO's and their immediate subordinates. All standard deductions & exemptions should be adjusted for inflation. Collect an export tax on natural resources/commodities such as oil, natural gas & grains. These strategies will reduce income inequality, declining real median family income and increase demand for "Made in America".
For more information go to mbrentpittman on LinkedIN.com andFacebook.com
- Reduce Indiana's decoupling from the Internal Revenue Code. That will promote simplicity and make Indiana more attractive.
- Eliminate the throwback rule. The throwback rule puts Indiana in a select group of states that imposes the throwback rule, and this makes Indiana less competitive. Among other things, this hurts Indiana's efforts to be a logistics hub, as well as hurts Indiana's efforts to attract businesses generally.
- Improve Tax Court Settlement Processes, by eliminating unnecessary approval processes in IC 6-8.1-3-17. This will expedite and otherwise enhance the process for the benefit of both taxpayers and the State, simplifying the process and making Indiana's judicial system more attractive.
- Make Indiana more attractive by reaffirming statutorily its status as a non-unitary state. Questions as to this have arisen in recent years due to DOR's frequency in forcing combined filing.
- Follow the recent MTC recommended changes and impose the burden of proof on the party seeking to deviate from the statutory allocation and apportionment formulas in IC 6-3-2-2.
- Amend assessment and refund procedures to create uniformity in process and time frames to avoid traps for the unwary. IC 6-8.1-5;6-8.1-9.
- Statutorily add isolated or occasional sales provisions for sales tax purposes, to promote transparency and create certainty. This will make Indiana more attractive.
- Make clear that taxpayers can rely on department publications, including examples in regulations, to promote transparency and create certainty. This will make Indiana more attractive.
- Allow the DOR to clean up its regs (an exception to the moratorium). This will make Indiana more attractive by reducing confusion.
Indiana needs to offer a business tax credit that covers 100% of the cost of relocating a business to the state. More Corporate Headquarters would be a great thing for the state of Indiana and especially around Indianapolis and the I-65 corridor in Merrillville. With Chicago and Illinois hiking taxes further a program to cover the cost of relocating a business to our state would be a great boom and needs to come sooner rather than later.
Make the process for individuals to claim Injured Spouse easier to follow. It isn't listed in the booklet for filing taxes. There doesn't seem to be a way to file as an injured spouse electronically when filing taxes. It takes months to get taxes back once Indiana snatches them. The process for Indiana should work off of the IRS process. Why do people have to jump through hoops year after year? Once it has been established that an individual is an injured spouse, why can't they be put on a list that says they have been confirmed as an injured spouse and reduce the paperwork and time it takes for the injured spouse to receive their refund. Unfortunately, many of the people who are injured spouses are already struggling to make ends meet. The long delay just makes things worse for them.
Please consider revising the IT-40 and eliminate unnecessary schedules. My IT-40 for 2013 consists of 11 pages with most of the schedules having only one entry. You could combine Schedule 1, 2, 3,4, 5, 6, 7 and the bar code into one or two schedules and save paper, processing time, and printing time. Having 11 pages of schedules to fill out every year is ridiculous!!
Provide Relief To Those With The Largest Burdens To reflect the realities of struggling working-poor families, and to help more Hoosiers close the gap between stagnant wages and the cost of the most basic needs, the state should seek to The most recent 3% reduction in the states personal income tax was regressive in its distribution. More than half (55%) of the 3% cut will flow to the best-off 20% of Indiana residents, while the bottom 60% will see 23% of the cuts, and the poorest 20% will receive just 2% of the cut. Currently, Indiana ranks as the 9th most regressive tax system in the nation (with the7th highest taxes on the poor). Combining all of the state and local income, property, sales and excise taxes, the average overall effective tax rates for Hoosiers, by income group are: 12.3 percent for the bottom 20 percent; 10.8 percent for the middle 20 percent; 5.4percent for the top one percent. According to the Institute on Taxation and Economic Policy, if the 3% cut had been in effect in2012: the poorest 20% of Hoosiers would see an average tax cut of just$6 per year; the middle 20% of Hoosiers would receive a tax cut of $33annually and; the top 1% of taxpayers would see cuts averaging over$694 per year.
Increase Indiana’s Tax Threshold And Personal Exemptions ”Currently Indiana is one of 15 states that taxes below the Federal Poverty Guidelines ($22,350 for a family of four in 2011). By enacting a $25,000 no tax floor, for example, families making below that amount owe no income taxes, but once income surpasses that level the tax is owed on all taxable income from one dollar up. When the Indiana income tax was enacted in 1963, the basic personal exemption was set at $1,000 per family member where it remains today. Since then, inflation has eroded the value of $1,000 substantially.
Increase The State’s Earned Income Tax Credit From 9% To 25% Of The Federal EITC The Earned Income Tax Credit (EITC) is a federal tax credit for low to moderate income working individuals and families, to which the state EITC is indexed. The credit reduces the tax burden placed on workers by offsetting payroll and income taxes. The credit is also refundable meaning that if the credit exceeds the amount of taxes owed, the difference is given back to the worker. Given the current status of working families, a stronger EITC may be more important to working families than ever before, particularly when low€income workers are taxed in a regressive system.
Eliminate the Marriage Tax Penalty (Recouple The State EITC With The Federal EITC Formula)€“During the 2011 Session the budget bill HB1001 decoupled Indiana’s State EITC eligibility guidelines from the federal guidelines originally expanded under the recovery act. As a result, those claiming Indiana’s EITC no longer benefit from the larger EITC payment to families with three or more children. Also,they no longer benefit from the reduction of the marriage penalty, which started the income phase out at a higher income level for married couples. Marriage penalties are not only regressive, but encourage cohabitation over marriage for low-income individuals.
Ronald H. Haack
Making payments using the DOR epayment system is close to the dark ages. Even the Feds do a better job. I have been challenging them for maybe 5+ years with little to show. I suggested that they follow the DOMV methods of making it so easy to electronically pay that most do. DOR forces us to pay bank fees, etc., DOMV does not. DOR prohibits scheduling a full year of estimated payments, the FED encourages it an makes it easy (and I DO). I have complained, and the results is sort of like "Yup, that is the way it is".
As a temp working at DOR, I have experienced the problems taxpayers are having with their paper tax returns. A tax workshop should be offered to those willing to take advantage of it free of charge in order for people to better understand how to fill out their paper returns. I notice a lot of people fail to submit their W-2's and 1099-G's for unemployment. Also, a lot of people do not do their math correctly. Simply suggest to people they use a calculator and have someone else look over the return before mailing it to the DOR.
Long past time to end the taxation of interest income in Indiana. DOR.
David W. Holt
Summary of Problem
Indiana unlike competing states such as Kentucky, Tennessee and Ohio applies the throwback rule to out-of-state sales of goods shipped from facilities in Indiana that would go untaxed in the destination state because the seller lacks nexus there (nowhere sales). Such out-of-state sales from Indiana are included within-state sales here, and thus figure in the calculation of gross income assessed for Indiana’s corporate income tax.
A potential 3PL client (e.g., a pharmaceutical manufacturer with or without other operations in Indiana) can either distribute from a 3PLin Indiana, and pay Indiana corporate income tax on nearly all of its sales, or it can retain a 3PL in Kentucky, Tennessee, or Ohio, and thereby pay almost no state income tax on its sales.
In an industry such as pharmaceuticals or medical devices, margins are relatively high and logistics costs are relatively low as a percent of sales, because of high-value density. Thus the state income tax avoided by choosing a 3PL in a non-throwback state can often exceed the total cost of distribution. Well aware of this fact, healthcare 3PLs focused on the largest segment of the business ”finished goods distribution€”have avoided Indiana, to ensure that their strategically located multi-client facilities can appeal to the largest number of potential clients.
How is Indiana losing out?
Indiana is therefore deprived of potential economic activity and itscommensurate tax revenue. First, manufacturers and other potential 3PLclients that would be subject to throwback choose to distribute from3PLs in Kentucky, Tennessee, or Ohio. Second, potential 3PL clients that donâ€™t generate meaningful taxable income (e.g.,foreign manufacturers, start-ups, etc.) and whose finished goods distribution would not be significantly affected by throwback have limited options in Indiana because 3PLs avoid locating their multi-client facilities in the state. Third, 3PL services unaffected by throwback (such as long-term storage, sample distribution, and contingency services) can often be offered more cost-effectively in multi-client 3PL facilities, which are located in non-throwback states for the aforementioned reasons.
How can Indiana rectify this problem without losing direct throwback-rule revenue?
Indiana should exempt from throwback all sales originating from a 3PLfacility. Because a 3PL client is able to outsource its distribution functions to a 3PL anywhere regionally or nationally, businesses now distributing from Indiana under the current law are doing so only because throwback does not apply to them. Exempting them from the throwback rule will, therefore, not alter their Indiana tax burden.
Why must the fix be permanent?
Any change to Indiana€™s throwback rule must be permanent to assure potential clients and out-of-state 3PLs that Indiana is a predictable place to do business. Most clients choose a single 3PL for all of their finished goods distribution. Given the significant costs involved in relocating such distribution, they seek a long-lasting strategic partnership. The sales cycle is typically 1-2 years, but can be longer, and contracts typically last 2-5 years, with open-ended renewal provisions. Implementation can be costly and may take as long as 6-12 months. Any uncertainty in the tax law would remove Indiana from consideration, both for potential 3PL clients and for 3PLsconsidering the substantial investment necessary to set up a multi-client facility in the state.
We have examples of companies who have lost business opportunities due to this provision and would be happy to have them testify on the negative implications to Indiana's tax competitiveness.
Three Ways to Improve Indiana's Tax Competitiveness
- Targeting specific weaknesses makes Indiana even more competitive and attractive for new business activity.
- Create an even better environment for those who already employ many Hoosiers and they will be in a better position to employ even more Hoosiers.
- The better the business tax climate, the more business investment will occur.
- A better tax climate and more investment equates to more jobs.
- Eliminate the add-back of the 199 deduction (the Domestic Production Activity deduction).
- This would benefit manufacturers of all sizes and types.
- This would simplify administrative compliance.
- This add-back is not required in 25 states, including Michigan, Ohio and Illinois.
- Do not require the throwback of non-US sales.
- Would be advantageous to Indiana’s global exporters.
- The throw-back rule is fundamentally unfair in its application and could by this limited measure at least reduce its negative impact.
- Throwback is not required in 29 states, including Michigan, Ohio and Kentucky.
- Exempt new machinery and equipment from the 30% depreciation floor.
- The 30% floor is arbitrary and punitive.
- This would very gradually phase out application of the rule and minimize the fiscal impact.
- There is no such arbitrary floor in any other state, and no tax at all in Michigan, Ohio or Illinois.
Ensure that profitable multi-national corporations are paying something resembling the legal rate.“When large companies are able to dodge almost all state income taxes on their U.S. profits, the inevitable impact is a tax shift away from big corporations and onto everyone else, including small businesses and middle-income families. Creating a level playing field between large businesses and mom and pop businesses should be a priority for state policymakers but that is best done by repealing harmful tax giveaways, not through reducing corporate income tax rates.
Shaw Friedman, Attorney
The non-partisan Multi-State Tax Commission for which 46 states are members estimates that Indiana loses approximately $346 million a year in state tax revenues due to various multi-state and multi-national companies employing various dodges such transfer pricing, abuse of tax havens and other gimmicks to avoid paying Indiana corporate taxes. Why not give all the tools necessary to our Indiana Department of Revenue including "combined reporting" and "de-coupling" to ensure that corporate taxes that are owed the state are paid, lessening the need for individual Hoosier taxpayers to have to make up the difference for these profitable entities that successfully escape paying their "fair share" of Indiana taxes?
Michelle L Cloud
Can a conference stacked with big business and right wing advocates come up with a tax structure that doesn't accelerate the movement of wealth to the top 1% of the population? A tax structure that leaves the rest of use ever closer to poverty mean that all those goods and services, needed infrastructure, education, and a safety net will be out of reach. These are all required for a healthy economy to flourish. The conference would be a lot more valid and useful if it were truly diverse. Why not invite Elizabeth Warren or someone who has the academic and intellectual bonafides to balance the discussion.
Why does Indiana still not have the capability to file business income tax returns electronically? If we want to remain competitive, we need to offer the latest advances in technology too. Numerous business clients of our firm have complained about not being able to file their Indiana business income tax returns electronically compared to so many other states where they can.
I own three franchise quick service restaurants in Hamilton County. Please do something to reduce the financial burden created by personal property taxes on businesses. This year I paid my accountant $700 per location to prepare these tax returns. The tax owed is actually less than the cost of the preparation.
I don't see a big reason to change the sales and use tax. This is easy to file and pay each month.
Thank you for believing there is a need to change the current system and for taking this step towards action. Hopefully something will actually come from this exercise.
So I hear you're having a tax conference I hope one of the methods you'd be considering would be a state version of the FairTax. It would certainly make Indiana a place businesses would want to locate.
Last legislative session, the General Assembly added IC 6-2.5-2-3 to require sellers of motor vehicles to collect Indiana sales tax from on-residents at whatever rate would be charged in the buyer's home state. This has caused quite a lot of work for DOR to accommodate, and it will be an ongoing burden to update information for dealers as other states alter sales tax rates. This will be difficult for dealers to comply with as well. What if we in Indiana, like several other states, had a lower sales tax rate for motor vehicles? If this were the case, buyers and sellers would have less incentive to misrepresent the terms of a sale transaction, Indiana would get the sales tax on transactions that take place within the state, and non-resident buyers would not be injured (as significantly) by paying more sales tax to an Indiana seller than they would be charged elsewhere. The fact that sales of used motor vehicles are not exempt from sales tax would ease the fiscal impact of a lower tax rate for such sales.
Christopher A. Bradburn
Indiana's sales and use tax laws create unreasonable compliance problems with respect to the sale of goods and services to organizations that present themselves as exempt. In a typical transaction, a customer presents an exemption certificate to a service provider (e.g. hotel services) or a vendor, and under Indiana's rules the burden falls to the seller to interpret sales/use tax law and determine whether the exemption is valid. The individual being presented the exemption certificate is generally not a tax professional, and while many companies make a good faith effort to educate personnel about applicable sales tax rules, it is unreasonable to ask a staff-level person (for example, a check-in desk clerk at a hotel) to determine whether an exemption is valid.
A taxpayer's failure to properly interpret Indiana's complex sales/use tax rules creates substantial risk of under-collection of sales tax. It also can create an unfair competitive environment if certain businesses accept invalid exemption requests but win the "audit lottery" and are not penalized for willful noncompliance.
The sales/use tax rules should be modified in order to create a single process for determination of exemption from sales tax. If an organization is awarded exemption, such exemption should apply to all transaction. The need for staff level personnel to interpret complex sales/use tax rules must be eliminated.
Expand the Sales Tax Base to Services. A less regressive way to increase state sales tax revenues in a more equitable manner would be to expand the sales tax base to include services, since lowincome taxpayers pay more in sales taxes than those of higher incomes, who tend to purchase more services. For example, if an individual purchases cleaning supplies to clean their home, they pay sales tax. However, if the same individual hires a cleaning service, they do not pay any sales tax.
Karl J Reusser
Redo your database used in your 'best information available' system. The numbers you use to scare those who fail to file on time are often ridiculous and usually grossly inappropriate. Base estimates on the history of the taxpayer, not 'industry averages' by business code. Such heavy handedness tends to make taxpayers cynical and they tend to ignore ridiculous estimates.
All taxes should be levied at the point of final purchase. Then the taxpayer knows how much tax he is paying. The taxpayer approves, or disapproves on Election Day with his vote. Taxes paid at any other point, in the manufacture and distribution of a product or service is a dishonest tax purposefully being hidden from the tax payer.
Corporations, first of all, are concerned about the bottom line. An increase in the number of corporations moving to Indiana would increase the number of jobs. More jobs means more products and services purchased and would result in more taxes paid. Those taxes would take the place of the taxes repealed to attract the corporation.
If we desire a prosperous state of Indiana we need to do the thing wean do to make the business climate as desirous as possible. We have advantages, location being the most visible. All we hear about Florida is that they do not have an income tax. We can do something about that. We cannot do anything about the weather. But if we are successful enough we can vacation in The Sunshine State.
- Greatly simplify the TIF mechanism (it is very complex, poorly-understood and subject to far too much costly outside legal and financial consultants) and
- better align/embed the TIF mechanism with cooperative and comprehensive local capital project planning that intentionally spans'silos' (eg. city and county).
I believe TIF simplification would greatly assist local economic development efforts and would complement the state's economic development programs.
Simplify the gasoline tax code. Specifically, simplify the calculation for how the gasoline tax revenue is distributed between the State Highway Fund and the individual counties. The existing calculation is very convoluted and makes it difficult for local counties to predict how much funding they will have for their road and street maintenance.
Remove the subsidy for ethanol-fueled vehicles from the gasoline tax code. This also complicates the gasoline tax code.
Simplified and reformed tax strategies: Create good paying American jobs with good benefits for American citizens by repealing all sales/consumption taxes & replace the lost revenue with an import tax/tariff on imported labor (India & the Philippines) & manufactured goods (Mexico & Communist China, North Korea & Vietnam). Burn both the federal & state individual income tax codes & give each income receiving American citizen a $50000 standard deduction while keeping current dependent exemptions. Then tax the next $50000 at 2%, the next$50000 at 4%, the next $50000 at 6%, etc. until the federal & state budgets are balanced. Collect impact fees. NO corporate welfare. NO illegal aliens. Increase the minimum wage. Burn USA business &corporate income tax codes & place a "fair tax" (with a standard deduction of $5 Million) on ALL USA business & corporate sales/revenue including foreign after deducting compensation and benefits for American citizens' labor; except for CEO's and their immediate subordinates. All standard deductions &exemptions should be adjusted for inflation. Collect an export tax on natural resources/commodities such as oil, natural gas & grains. These strategies will reduce income inequality, declining real median family income and increase demand for "Made in America".
All Hoosier workers should just pay State & County Taxes individually with no deductions or exemptions.
Indiana could even lower the rate since they'll be getting more from EVERYONE due to no deductions/exemptions.
Plain and simple for everyone.
Pete De Bonte
For the following suggestion/request, I use the Social Security deduction as an example, but certainly isn't limited to that application.
It is gracious of IN to offer a deduction for Social Security income, but couldn't people who receive SS still use a simplified individual income tax return form? For someone previously using the EZ, but now wanting to add just the one number for the SS deduction, the required forms explode from 3 pages of IT-40EZ + CT-40EZ to 7 pages of IT-40 +CT-40. That's 5 extra schedules on 4 extra sheets, plus a more complicated CT-40, just to add one number. Each of those 5 extra schedules were represented by one or two lines of the EZ. Schedule 7is included just to give you my phone number.
I imagine there are many ways this could be simplified, but I'll offer one idea: how about a form more like the EZ, yet with options to file individual schedules only as needed. For example:
-"Enter your state & county tax totals here, or if you have other credits, the total from Schedule 5, line 8."
-"Enter your rent deduction here, or if you have other deductions, the total from schedule 2, line 12."
-Couldn't people who want to submit one of the numbered Schedules, yet live and work entirely in IN, still use the CT-40EZ?
All this makes me more appreciative of the EZ form! :-)
Thank you for your time.