Lawmakers ready to ax business tax

Published: Thursday, February 25, 2010

Lawmakers ready to ax business tax

CONCORD – The state’s controversial new tax on owners and investors in limited liability companies could disappear by its one-year anniversary.

Gov. John Lynch and top leaders in the state Legislature have privately reached a consensus to support repealing the levy, which they had counted on to raise $15 million a year, Democratic sources told The Telegraph on Tuesday.

Final action could be weeks away and the details of when, where and how to bring about this repeal have yet to be finalized. The move is likely to be linked to Lynch’s request of department heads to propose $140 million in spending cuts to the current, two-year state budget, sources added.

The Legislature must act on any changes to the ailing state budget before the 2010 session wraps up later this spring.

Prior to the new levy, the state was taxing unearned income from owners or investors in so-called “S corporations,” but not the owners or investors in LLCs, most of which are small businesses.

A Manchester real estate LLC and its law firm have sued the state over the tax, charging that it is unconstitutional.

Repealing the tax would disarm a weapon that state Republican leaders, GOP lawmakers and conservative groups have used to bludgeon Lynch, branding the LLC tax as a “job killing income tax.”

GOP opponents claim that controversy over the tax has already exposed the three-term governor as a poor manager who was tone deaf to complaints from business owners from across the state.

According to sources who did not want to be named, Lynch and top Democratic lawmakers agree that the legislative debate over the LLC tax raised legitimate concerns. The sources said that political opponents skillfully stoked fears among other small business owners that they would somehow be caught in this net.

State tax officials estimated that 20,000 individuals would pay the tax. That compares to 70,000 who now pay the 5 percent tax on dividends and interest.

Meanwhile, financial experts warned Lynch and legislative leaders that tax advisers have come up with legal ways to avoid the LLC tax, which include moving a business headquarters outside New Hampshire or creating an out-of-state trust.

Senate President Sylvia Larsen, D-Concord, confirmed such talks with Lynch and legislative leaders have occurred but would not confirm an agreement was reached on the future of the LLC tax.

“It’s under discussion,” Larsen said.

For her part, Larsen believes any change to the tax should be coupled with an extensive review of how to make taxing business as fair as possible in New Hampshire.

“We need to undertake a fundamental review of how business taxes are applied to see if they can be done more fairly than they are now,” Larsen said during a telephone interview. “That’s a more long-term study but it should get underway.”

Larsen said legislative testimony in recent weeks has already turned up issues that lawmakers were unaware of last June when they tucked the tax provision into a state budget trailer bill without a public hearing.

“I think it’s a credit to the Legislature. It’s not easy to go back and review decisions we have made, but we are,” Larsen added.

Lynch Press Secretary Colin Manning confirmed that talks took place but declined to say if a final agreement was at hand.

“The governor has heard concerns from business leaders and there’s a concern that as we close one loophole of the law, another loophole is created,” Manning said.

Asked whether Lynch endorsed outright repeal of the LLC tax, Manning would only add: “The governor is going to continue to work with legislators and business leaders to ensure we have fairness across our tax system.”

House Speaker Terie Norelli, D-Portsmouth, was unavailable for comment on this story.

Publicly, Lynch maintains that the so-called LLC tax closed a loophole because unearned income going to investors in corporations was taxed as a stock dividend, but similar cash as non-salary bonuses going to those with holdings in the other business entities was not.

Some of Lynch’s political advisers had been urging him to endorse repeal because the governor may need bipartisan legislative and business leader support to close the budget deficit.

The same advisers privately suggested that the $15 million in revenues from this tax were not worth the political fallout to Lynch and the Democrats who have controlled this Legislature since 2006.

Chris Williams, president of the Greater Nashua Chamber of Commerce, said repealing the LLC tax is the best way the state can encourage small businesses to grow coming out of this recession.

“We continue to believe that outright repeal is the best outcome for small business in New Hampshire,” Williams said. “The Legislature’s support of repeal can go a long way to getting the business community to find common ground as lawmakers try to deal with a looming budget deficit.”

Former state senator and lobbyist Robert Clegg is a co-founder of the Small Business and Small Industry Association of New Hampshire, created last fall in the wake of opposition to the LLC tax.

“This restores my faith in the legislative process because this does put them in an even deeper budget hole,” Clegg said. “If it comes to pass, I for one will do all I can to help them find a real solution to the budget and I will urge everyone in the small business community to do the same.”

But Republican State Chairman John E. Sununu said repealing the tax would be an admission of incompetence on Lynch’s part. It will not diffuse the issue as Lynch is expected to seek a historic fourth term, Sununu maintained.

“If this rumor is true, it underscores this governor and the tax-and-spend, Democratic leaders in the House and Senate have realized how irresponsible and job-killing the LLC tax they passed last year truly was,” Sununu said. “In the meantime, as we waited for them to come to their senses, the business community in New Hampshire was frozen in hiring or adding investment that would have created jobs.”

Sununu insisted it will only get done because Lynch and Democratic leaders fear the voters will throw them out of office in November, Sununu said.

“This is equivalent to having the governor put a sign on his back as he campaigns for re-election that says, ‘I am incompetent,’” Sununu said.

On Feb. 7, The Sunday Telegraph reported Lynch was open to making changes to the LLC as a result of talks he had been having for weeks with key legislators, tax experts and some business leaders.

Under one scenario, repeal would apply to unearned income from LLCs, proprietorships and partnerships paid out to their owners or investors after Jan. 1, 2010. It will not change the reality that LLC owners have to pay the tax on such unearned income for all of 2009.

Dividend and interest tax returns for 2009 are due April 15, although Revenue Commissioner Kevin Clougherty said he expects all reasonable requests for an extension will be approved.

Only last Friday, a legislative oversight committee approved the final rules that Clougherty’s agency would use to implement the LLC tax for the 2009 tax year.

BIA Says State Budget that Included LLC Tax a "Compromise" That They Supported

Contact: Adrienne Rupp

Business and Industry Association

Office: 603.224.5388 x114

Mobile: 603.731.7754

arupp@nhbia.org

BIA: State budget a compromise

New Hampshire’s statewide chamber of commerce supports compromise budget

CONCORD, N.H. – June 23, 2009 – Having received written confirmation Monday evening from Kevin Clougherty, commissioner of the NH Department of Revenue Administration, that the extension of the interest and dividends tax embedded in the state budget will only apply to individuals receiving distributions from limited liability companies (LLCs) or partnerships only to the same extent that distributions to corporate shareholders are taxable as dividends, the Business and Industry Association today announced its support for the state budget approved by House and Senate conferees last week.

Calling it a “compromise,” BIA President Jim Roche said the budget removed several revenue sources that would have adversely affected the business community directly and indirectly, including the suspension of the BET credit against the BPT, capital gains and estate taxes, and freezing of the insurance premium tax reduction. Roche nonetheless expressed unease over last minute inclusion of the interest and dividends tax on LLC distributions and additional cuts to the Medicaid program that will ultimately result in higher insurance premiums to the business community.

“It’s not a perfect budget,” said Roche. “Throughout the budget process, our message to legislators was to model their actions on what businesses of all sizes throughout New Hampshire have been doing for months—tightening their belts—not raising taxes or increasing costs for business. Businesses will lead New Hampshire out of this recession if given a chance.”

BIA was particularly distressed about the extension of the interest and dividends tax to LLC distributions at the last possible moment last week. Calling it “an example of poor public policy-making,” Roche went on to say the written assurances from Clougherty have addressed BIA’s concerns but that confusion over the language could have been easily avoided had the Legislature followed standard processes for hearing and considering legislative proposals.

“In the end, our concerns regarding the LLC provisions were answered,” said Roche, “but the past several days have shown there are risks associated with passing complex tax legislation without a thorough public review.”

While recognizing that HB1 and HB2 are imperfect, BIA believes passing the budget on Wednesday is critical and that one possible result of not passing the budget will be a reopening for discussion of any or all of the more onerous business tax proposals previously included. “It’s not unreasonable to believe a budget stalemate between the House and Senate could lead to increases in the BET and/or BPT,” Roche said. “That would spell disaster for New Hampshire businesses, job creation and economic recovery.”

Op/Ed from Rep. Dave Hess

Democrats and the Tax Assault on Small Business in NH

Killing Our Golden Goose

Small businesses here in New Hampshire are the economic backbone of our state. They are they engine that drives the New Hampshire economy, creating 65% of all new jobs. How then, Governor Lynch and the Democrat leadership in the legislature inexplicably want to impose newly passed taxes on these entrepreneurs at a rate nearly twice as high as any other taxpayer. And, they are justifying it with the lame, inaccurate claim that they are simply “closing a loophole.” Either they really don’t know what they have done, or they don’t’ know how to undo it.

Here are the facts from the governor’s own appointed tax Commissioner Kevin Clougherty, who claims that expanding the 5% dividends tax to limited liability corporations (LLCs) and small partnerships will raise $15 million a year in new taxes from 20,000 taxpayers. Simple third grade math will tell you that the State will be collecting taxes on an additional $300 million of income ($15 million is 5% of $300 million). But this isn’t new money. Rather, this is $300 million that the bureaucrats in Concord want to relabel from “compensation” to “profit.”

How are they going to do that? By passing HB1607, the second shoe to drop in the Democrats’ tax assault. This legislation was heard before the House Ways & Means Committee last week. The purpose of HB1607 is to empower the State Department of Revenue Administration (DRA) to set arbitrary standards of what is “reasonable compensation” for every sole proprietor, partnership and LLC in the State. That is a 180 degree change from current practice in which the department examines or “audits” individual taxpayers which are flagged as unusual or suspicious. Moreover, HB1607 would allow the department to set these standards by administrative rules, without legislative review and approval. This would make the commissioner the New Hampshire “pay czar” over every small business in the State. By comparison, the federal “pay czar” only has oversight of executive compensation in those few companies that have received taxpayer money in the form of TARP bailouts. In other words, the power wielded by Czar Clougherty would make the federal pay czar pale in comparison.
So where does it all lead? Once this income stream----remember DRA projects it will affect 20,000 taxpayers—is relabeled “profit,” guess what? It will also be taxed as business profits at a rate of 8.5%, imposing additional taxes on these entrepreneurs of $25.5 million.

What is the final tax bite? The overwhelming majority of partnerships and LLCs in New Hampshire are small businesses with only one, two or perhaps a handful of active members and partners. Active in that they work long hours, often for years, before they begin to take home a decent income. These are people who take risks everyday, who wake up in the middle of the night worrying about their business, who put themselves and their families on the line by incurring personal debt.

And how are the Democrats in Concord going to reward them? By taxing them at an effective rate of 13.5%! So much for the New Hampshire Advantage.

Testimony on HB 1661 from former Senior DRA Official Val Berghaus

Testimony in Support of House Bill 1661 Reversing the Recent Changes to the Interest & Dividends Tax, RSA 77

The intent of the recent changes to the Interest and Dividends (I&D) tax (the so-called “LLC tax”), so says the Department of Revenue Administration, is “to bring fairness and parity” to the tax. ” In the view of the Commissioner, the new law “closes the loophole” in the tax’s treatment of LLC’s. Following the DRA’s lead both the governor and the legislative leadership have defended the changes as necessary to achieve “fairness in our tax system.” By asserting this viewpoint, those holding it strongly imply a constitutional infirmity in the existing tax that requires radical change. Not so. There was no constitutional problem with the old tax. In order to illustrate this one must understand how the old tax actually worked; an explanation that has notably been absent from the presentations heretofore put on by the DRA.

The old I&D tax, enacted in 1923, set about changing the way investment property was to be taxed in New Hampshire. Instead of selecting “money in hand” as the measure of taxable property, it proposed taxing “money received.” That is, instead of taxing the value of shares of stock or “credits,” i.e., the right to receive money from a debtor, the tax would be levied on the actual dividends or interest paid to the owner or creditor. The taxable parties would be individuals, partnerships and fiduciaries receiving such income. But not corporations, corporations would be exempt. The rationale was: if the interest and dividend income received by a corporation were taxed and dividends paid by the corporation also taxed when received by its owner(s), the result would be an unequal burden. Corporations, therefore, ought in fairness to be exempt from the tax. This disparate treatment passed constitutional muster under the sharp scrutiny of the N.H. Supreme Court in Connor v. State, 82 N.H. 126, 132 (1925).

The distinction between taxable and nontaxable parties was elaborated in the former I&D tax by incorporation of the concept of “transferable” versus “not transferable” shares. This concept formed the demarcation between who was a taxable person and who not. It was recognized that corporations almost always had shares that could readily be transferred without substantial impediment. However, other forms of organization such as partnerships, associations and trusts might also have interests that were freely alienable like corporations and therefore ought to be treated similarly. On the other hand, non-corporate organizations which had beneficial interests not represented by transferable shares would be subject to the I&D tax on their receipt of interest and dividend income the same as individuals and fiduciaries.


This distinction makes sense. Since non-transferrable shares have no intrinsic value, they are incapable of alienation. Of course the underlying assets represented by the shares may have value and may be sold or transferred, but that is not the same thing. Contrast this with transferable shares of stock which may be sold on the market and thereby acquire value independent of the assets they represent. This distinction is perfectly consistent with the historical purpose of the old I&D tax’s change of the measure of taxable value from “money in hand” to “money received.”

In 1993, about the time that LLC’s were established in New Hampshire law, the I&D tax was amended to include them along with partnerships, associations and trusts. As a result the same dividing line was applied to LLC’s as to these non-corporate entities. Thus, if an LLC had transferable shares it was exempt from tax on its receipt of interest and dividend income. Its owners, however, would be taxable on dividends they received from their LLC the same as if it were a corporation. On the other hand if the LLC’s shares were not transferable, then it paid tax on interest and dividend income received by it just as did partnerships, associations, trusts, fiduciaries and individuals..

A fundamental touchstone of taxation in New Hampshire is the “rule of equality,” given powerful and long lasting voice by Chief Justice Doe in State v.Express Company, 60 N.H. 219 (1880). For 86 years the I&D tax existed without successful challenge that its treatment of taxpayers violated this rule. Yet the DRA this past year – substituting its own wisdom – seems to have concluded that it did and therefore the tax was unfair to some taxpayers. Either the DRA grossly misunderstood the core precept or some other definition of tax “fairness” – not readily apparent on its face or adequately explained – was intended.


The DRA must have recognized that its radical proposal to change the I&D taxed fundamentally altered the original impost’s limitation to the taxation of only passive investment income. It was never intended in 1923, or for any year thereafter until 2009, to tax earned income or income from capital gains. The law as passed in House Bill 2 last June does exactly that. However, the DRA, with respect to at least earned income, has attempted by rule to limit the scope of the new tax. The proposed DRA rule borrows the “compensation deduction” concept from the Business Profits Tax. However, the compensation deduction is the singularly most problematic feature of the BPT. The difficulties in interpretation and enforcement are legion. It has provoked more discussion, litigation and wringing of hands than practically any other facet of the BPT. More than one attempt has been made to legislatively alter or “clarify” the provision, including HB 1607 introduced this session. The incorporation of the reasonable compensation provision into the I&D tax exponentially expands the complexity of the law and by extension the burden of compliance on taxpayers. Even if ultimately no tax is found to be due, the administrative expense in time and anxiety on the part of the business person and the costs to acquire expert accounting and legal help will amount to a significant economic burden, make no mistake. Furthermore, the burden on the agency relative to administration and audit is also greatly increased. It beggars reason to understand why anyone would want to move from a simple impost like the old I&D to one that is guaranteed to generate such headaches.

The new I&D tax, therefore, cannot be defended on the basis of “fairness.” Furthermore, there was a blatant lack of transparency in the way it was enacted: introduction and passage at the eleventh hour of the 2009 session. Contrast this with the way the Business Enterprise Tax was handled. The initial concepts of the BET were formulated and language drafted within the DRA with the assistance and counsel of an expert outside tax practitioner. The first draft was then introduced to the public by the governor himself in a well publicized hearing, accompanied by a very long and thorough explanation of the technical aspects of the proposed new tax. Following this were months of committee working sessions with much input from the public, with revision upon revision, until finally a consensus was reached and the bill enacted July 1, 1993. It was immediately followed by work on comprehensive rules -- rules actually begun before the bill became law -- so that taxpayers would have early guidance to effectively plan for the day the first returns were due. These rules were promulgated initially as interim rules in September, 1993, and then as permanent rules in January, 1994. All in all, there was a thorough vetting of the proposal in the public arena, a feature almost entirely lacking from the recent I&D tax changes.

Now that the public is fully aware of what transpired last June, many problems with the new law, and in particular the rules being promulgated to administer it, are coming to the fore. Certainly the recently filed lawsuit illustrates this. It is time to take a big step back and reconsider this ill-considered law in an open and transparent way within the tradition of New Hampshire. Furthermore, taxpayers need to be put at ease for the present while the process works itself out. For this and the other reasons cited above, HB 1661 ought to be passed into law as soon as possible.

SBSIA in Todays Nashua Telegraph

Thursday, January 21, 2010

Officials move to soften tax impact

By KEVIN LANDRIGAN

CONCORD – State tax officials moved Wednesday to relax bookkeeping and the treatment of debt in the new state tax on investment income from limited liability companies.

Revenue Commissioner Kevin Clougherty said changes to the draft rules crafted in late November came after complaints from taxpayers and accountants at three public hearings along with many individual telephone calls and e-mails.

“We have made significant changes to address the concerns we have been hearing,” Clougherty said.

Greater Nashua Chamber of Commerce President Chris Williams said the new tax on LLC investments has been a “debacle” since its inception, and these changes don’t erase the harm it will do to the business climate.

“The bottom line about this debacle is it’s bad public policy in a bad economy, which spells bad news for businesses in New Hampshire,’’ Williams said.

Former state Sen. Robert Clegg, of Hudson, claimed the treatment of owner or shareholder income under these rules goes beyond the legislative intent of the new tax.

Clegg, a co-founder of the New Hampshire Small Business and Small Industry Association, said Clougherty has “used the rules to expand the taxing authority of state government.”

Clougherty stressed that these revised rules do not change estimates the tax will apply to about 15,000 individuals who own or have shares in these companies, and it will generate $15 million a year in state revenue.

The tax is levied on any investment profit made after Jan. 1, 2009.

“We think this is an important step forward,” Clougherty said.

Last week, a Manchester law firm filed suit challenging the constitutionality of the tax’s timing since lawmakers adopted it in June but have applied it to investment profits made six months earlier.

This change in bookkeeping means individuals do not have to supply the state with the profit and loss records for their business investments made before Jan. 1, 2009, unless it’s to their tax benefit to do so.

The draft plan could have required any taxpayer to come up with records since the inception of the business.

Under the proposed rules change, debt issued from LLCs to investors is not taxable unless the parent business had profits to distribute.

Clougherty said he doesn’t believe this tax is a ‘’determining factor’’ for investors in the thousands of LLCs in the state formed to develop or own real estate.

But critics of the tax said these rule changes do not allay their claims it amounts to a new tax on the income earned, especially by closely held owners of LLCs and proprietorships.

House Deputy Minority Leader David Hess, of Hooksett, said the essential nub of opponents is it extends a traditional state tax on unearned income to the earned profit of actively working investors or individuals running an LLC.

“How are they going to decide what is profit and what is compensation? This does nothing to resolve that,” Hess said.

Nashua CPA David Heath said lawmakers at a minimum should change the LLC tax law to reflect this revised rule regarding debt.

“Regardless of the rules and how well they are written, New Hampshire still remains the only state in the Northeast that now imposes a tax on income at the business level and at the individual owner level,” said Health of Melanson, Heath and Co. based in Nashua.

“That goes right to the economic competitiveness of the state.”

A House committee took testimony Wednesday on a Hess-authored bill (HB 1661) to shelter those investor or individual owner profits from being taxed after July 1.

The Business & Industry Association supports complete repeal of tax that became part of an omnibus trailer bill that state budget negotiators endorsed during early morning negotiations last June.

“The reality is they are trying to develop rules over a law that was improperly vetted. You can’t fix bad legislation through the rule-making process,” said BIA Vice President David Juvet.

SBSIA in Today's Concord Monitor

State proposes altering LLC tax New rules could simplify process

By SHIRA SCHOENBERG
Monitor staff

January 21, 2010

The state Department of Revenue Administration yesterday laid out new proposed rules for the LLC tax.

Revenue Commissioner Kevin Clougherty said the changes were made as a result of public input and were aimed at simplifying the process of paying the tax.

"The proposed rules from November have been significantly changed to address the concerns raised as part of the process," Clougherty said.

Clougherty submitted the rules to the Joint Legislative Committee on Administrative Rules, which will decide whether to approve them at its Feb. 19 meeting. If so, the rules would be finalized two months before the tax is due. Taxpayers already have their interest and dividends tax forms, and the Department of Revenue Administration will likely send out another mailing with information on the change.

The law extending the state's interest and dividends tax to limited liability companies was included in the 2009 budget. There has been strong opposition from Republicans and small-business owners who say the tax will hurt the business community. They are angry that the tax never had a full public hearing, since it was adopted during the budget negotiation process.

The proposed changes seem unlikely to quell any opposition. Yesterday, Republican leaders complained that House Speaker Terie Norelli arranged a "secret meeting" between Clougherty and Democratic legislators. Business advocates said the new rules would not change their opinions.

"(The tax) needs to be heard by both the House and the Senate, and both need to vote on it," said former state senator Bob Clegg, founder of the Small Business and Small Industry Association.

Clougherty said there were three major changes made to the rules. First, to simplify record keeping, companies will only need the information that they already put on their federal tax forms. That will minimize the amount of new records companies need to keep. (Companies will need one additional record that documents compensation.)

Second, dividends are only taken out of "accumulated profits," the amount of money a company has made over time. The new rules say that when companies figure out their accumulated profits, they can start either with Jan. 1, 2009, or with the inception of the company. That means a five-year-old company that took losses its first four years can balance those losses against any gain it made in the fifth year when it figures out its profits. Companies that do not have records stretching back to their inception can simply calculate their profits from 2009.

Third, if an owner is loaned money by his corporation and distributes that money to himself or shareholders, that distribution will not be counted as a dividend. (Certain conditions must be met to ensure that the loan is legitimate.)

Clougherty emphasized that the tax will not affect most small businesses.

"Most small businesses are not taking distributions," he said. "They keep (profits) in the company as retained earnings."

The dividends tax only applies to a business owner who takes his compensation, then takes additional money for himself out of the company's profits.

Currently, 80,000 people file interest and dividend forms, and about 72,000 of them pay the tax. Clougherty estimated that the extension of the tax will add 15,000 to 20,000 paying individuals. He has estimated that the state will get an additional $15 million a year.

Despite small-business owners' claims that the added tax will hurt their businesses, Clougherty said the impact will likely be marginal.

"Not every deal in New Hampshire is so thin that this will cause someone not to invest," Clougherty said.

The Business and Industry Association has called for the tax to be repealed. Spokeswoman Adrienne Rupp said yesterday that the association could not comment on the specific rule changes.

"We feel the Legislature should start over," she said. "We've come out in support of repeal of the tax because of the whole process and confusion that was created."

Former revenue commissioner Phil Blatsos, who opposes the tax and is on the board of directors of the Small Business and Small Industry Association, said the rule changes have their own problems. For example, by using the profit numbers that companies declare on their federal tax returns, the state ends up taxing capital gains - even though legislators rejected a capital gains tax.

"It's a capital gains tax on just proprietors and partners," Blatsos said.

The idea of documenting profits since a company's inception is not possible for most small businesses, Blatsos said, since financial records by law only need to be kept for three years. That means most small businesses would have to calculate their profits beginning in 2009 - and could not account for years of losses before the tax kicked in.

Meanwhile, House Republican leaders accused Norelli of setting up a closed-door meeting with Clougherty yesterday for only the Democratic members of the Joint Legislative Committee on Administrative Rules and the House Ways and Means Committee.

"By ignoring the Republicans who serve their constituents on those vital committees, Speaker Norelli is telling the people of New Hampshire that their opinion doesn't count in this matter," said Rep. David Hess, the deputy House Republican leader. "They added this tax in the middle of the night, without a public hearing, and now they are trying to pervert the process with secret, one-sided briefings and preferential treatment."

Norelli was sick yesterday and unavailable for comment. Rep. Susan Almy, a Lebanon Democrat and chairwoman of the Ways and Means Committee, said the meeting was done with only the Democratic caucus because the tax has become so partisan.

"Because there's been so much political heat thrown at this issue, it's very difficult to have a reasonable conversation and ask questions about it in a larger group," Almy said.

Clougherty said he did not realize only Democrats were present.

"If I'm asked to go to a meeting with any elected officials, I show up," he said.

Clougherty said he was asked to come to the meeting to discuss what stage the department was in in terms of developing the rules. He told the legislators that the rules were about to be posted online. Almy said she also wanted the committees to talk to Clougherty about a House bill that addresses "reasonable compensation," the amount a business owner can take as compensation before it is considered a dividend.

The issue is related to the LLC tax because previously only corporations had to determine reasonable compensation for tax purposes and now limited liability companies will have to make the same calculation. Almy said she hopes the Legislature will pass a bill before 2009 taxes are due to give companies more definitive guidelines on how to determine reasonable compensation. But Clougherty said if that does not happen, there is a statute that addresses the issue, which will remain in place.

Small Business and Small Industry Association Speaks Out Against Final Rules on LLC Tax Released by NH Department of Revenue Administration

FOR IMMEDIATE RELEASE
January 20, 2010

Small Business and Small Industry Association Speaks Out Against Final Rules on LLC Tax Released by NH Department of Revenue Administration

Concord, NH – The Small Business and Small Industry Association has issued the following statements following the New Hampshire Department of Revenue Administration releasing the final rules for the LLC tax that was passed as part of the 2009 budget.
"We at the Small Business and Small Industry Association (SBSIA) believe that despite the recently released changes to the proposed rules governing the LLC tax that this tax is an income tax on small business owners and as such will greatly reduce their ability to create jobs. This tax unfairly burdens small business owners and steals their dreams of success. This tax is a drastic change to our tax system and we strongly believe that any change of this magnitude needs to go through the proper legislative process of several public hearings in both the House and the Senate allowing every elected official the opportunity to clearly show their constituents how they vote on such a scheme. The DRA needs to admit it has not defined the rules in a timely manner to institute the tax for 2009 and thus instruct the legislature of its inability to collect the tax "said SBSIA chairman former Senator Bob Clegg.

"Never in my over 30 years at the Department of Revenue Administration have I ever seen such a drastic change to our tax law without a single public hearing. The fact that the rules can change so drastically shows just how flawed the rules were to begin with. Moving forward with these rules and not repealing this LLC tax will cost the state of New Hampshire countless jobs and millions of dollars of lost economic activity,” said SBSIA board member and former DRA Commissioner Phil Blatsos.

Upcoming Work Session on "Reasonable Compensation"

Ways and Means will hold a full committee work session on HB 1607 - the bill discussing "reasonable compensation" this Friday January 22nd at 9:30 a.m.

This is not in the calendar and the notice that was e-mailed to committee members but did not have a room number on it.

Tell all of your interested constituents ---

Former state revenue chief slams small business tax as 'Insidious' job killer Could cost 600 jobs a year, Blatsos says

Former state revenue chief slams small business tax as 'Insidious' job killer
Could cost 600 jobs a year, Blatsos says

By Nate Giarnese
Reporter
nate@conwaydailysun.com
—
The former chief of the state Department of Revenue Administration said a controversial tax hike on limited liability corporations could wipe away 450 to 600 jobs a year in the Granite State, striking sharply at the heart of the state's historic small business advantage.
“Forty-two percent of of all jobs in the state come from small business,” said Philip Blatsos, who worked 30 years for the revenue department and was commissioner from 2001 to 2007.
He said a 5 percent interest and dividends tax being tacked onto distributions made by LLCs and other small businesses forces the owners of mom and pop operations to cut back on hiring as they face troubling uncertainty about the future of tax bills.
Small businesses file as sole proprietorship or LLCs to gain shelter from certain tax and insurance regulations imposed on larger corporations. LLCs, including shop owners and loggers, are prevalent in the North Country.
“They mortgage their house to make payroll for God sakes,” Blatsos told The Conway Daily Sun.
The addition of a dividends tax in many cases triggers an additional 8.5 percent state profits tax to kick in, fueling in reality a much larger and unexpected hike for small business owners, Republicans complain.
Blatsos, representing a pro-business group, attended a final of four public hearings on the tax, during which about 100 came out at Kennett High on Saturday.
It is the result of a legislatively-set DRA administrative rule change last year. It's now under fire by Republicans and business groups as a bid to insert the hikes without a legislative hearing. The rule is expected to be posted in coming days and the tax could take affect in April and be retroactive to January 2009, state Rep. Gene Chandler, R-Bartlett, said.
Blatsos said an increasing New Hampshire tax burden coupled with a sudden uncertainty in the future of the state's commercial tax code threaten to curb economic growth. Small businesses may pull back on expansion while prospective business owners may think twice before moving to New Hampshire, Blatsos said.
“New Hampshire was always very stable as far as taxes,” he said. “We're the best. This is insidious, this is a real danger.”
But an area Democrat said the change simply alters how an existing tax on larger corporations is applied. It was framed by revenue officials as spreading tax equity across small and large businesses, the latter of which already pay an interest and dividends tax, state Rep Tom Buco, D-Conway, said.
Moreover, he said the tax was critical to help the governor close a huge budget gap last year after a slew of other unpopular tax hikes were scrapped.
“The only way to increase revenue is to have these small increases every couple of years in the sources of revenue that we have,” Buco said. “It was presented as a way to close a loophole in the interest and dividends tax.”
The tax targets distributions made by LLCs. That includes payments made to owners or partners beyond what the state decides is beyond reasonable compensation, Republicans complain.
“A large portion of businesses are going to be taxed at 13.5 percent,” state Sen. Jeb Bradley, R-Wolfeboro, said. “In reality it is an income tax on business owners.”
Others insist it is not.
“Most people who have LLCs are not even going to be affected by this,” said Buco. “You don't have to pay tax on your compensation.”
Buco noted other unpopular tax proposals, such as an entertainment tax, were stripped out of the 2010 budget.
“I was quite relieved that some of the other taxes proposed were not included in the budget,” he said.
Many of those proposals, however, brought a rain of public outrage as Republicans slammed them amidst legislative wrangling sessions. But the LLC tax was inserted in a broad budget package at the last minute before the budget passed, allowing it to duck the usual vetting in legislative hearings, critics said.
“It was late at night in some back room. There was no morning. There was no hearing. There was no other side,” Blatsos said. “I've closed a lot of loopholes, I wouldn't have closed this one.”
Chandler said while he expected the tax will be implemented, a repeal bid is “gaining steam.” The matter will be hashed out amidst slew of committee review sessions in coming months.
“At least the department realizes what a problem it is,” he said.
Buco chastised critics for turning rule-making hearings in Concord, Plymouth, Berlin and Conway into political forums he said were fraught with “misinformation.”
Blatsos and Chandler said they don't blame the office of DRA commissioner Kevin Clougherty, who they said is just following rules set by lawmakers.
“They didn't pass this law, they're just trying to take something that's very poorly written and make it work,” Blatsos said. “The bad people are the ones who passed it.”

The Fight is Not New to Members of SBSIA. This is a Letter to the DRA Commissioner Telling Him He Was Destroying Small Business.

Commissioner Kevin A. Clougherty
Department of Revenue Administration
P. O. Box 2035
Concord, NH 03302-2035


Dear Commissioner Clougherty,

You’ll be happy to know that one more business has been destroyed by a tobacco tax increase. Therefore, you’ll have less to enforce. It’s a “win-win” for you—our license as a “vending machine operator” is paid through June 30 of 2010. You can let the enforcement guys know over at the Liquor Commission that their attempts at “compliance exercises” are no longer needed at our house anymore—besides, being down to two machines over the last licensing period meant no cigarettes were ever kept at our house. Purchases of our tobacco products were accomplished on the way to stock our machines. Incidentally, a “vending machine operator license” means we didn’t have products available for sale to the general public anyway; we were not licensed for retail.

Our cigarette machines were not able to absorb the new prices, with the taxes imposed by the Federal government and the State of New Hampshire. Quite frankly, since lawmakers and commissioners rarely stand up for their licensed partners in business anymore, it was an easy choice not to replace the older machines with new machines to accomplish the ability to go over $6.00 a pack. We were fairly sure that no one from your department would be there to make sure cigarette vending machines would not be outlawed in the coming years. We stopped buying cigarettes last February. The last empty machine was pulled from its location on May 21.

Incidentally, when you fail to stick up for your licensed businesses, and forget that your department has the additional challenge of being a partner to your licensees, with the implied legislative charge of enabling the growth of said businesses, the end result can be that the state has less money, NOT more for its budget in the coming years. Prior to this business closing, we had a convenience store. Part of the reason we sold that business was to raise the funds to pay the tobacco floor stock tax. You may be interested to know as the taxes rise, sales slow down (particularly for those businesses that are not close to a border state); and since tobacco is not a returnable product for most Independent retailers, that means the “little guys” become “sitting ducks” for further taxes on their dusty, crunchy, “unsellable” and “non-returnable” stock. Since we are not the only business in Concord that has been subject to poor legislative decisions, we remain sure that anyone over in the Sweepstakes Commission can tell you what has happened to sales of lottery tickets in the Concord area, once the tobacco dealers went out of business. Our “out-of-state” buyers replaced their trips to New Hampshire with trips to the Indian Reservations in New York. We are sure that even those mathematically challenged members of your staff, as well as some lawmakers, will understand that a business that sells 2,000 cartons of cigarettes a week does NOT make more for the state by dropping to 35 cartons a week, over the period of less than five years—no matter how many times a cigarette tax is raised. It might be helpful, too, for you as a commissioner, to point out to less enlightened lawmakers, and special interest groups, that less sales of tobacco does NOT mean that more money will be spent on other products in a seller’s store—it means that tobacco customers no longer have any reason whatsoever to shop with that merchant, or possibly come to the state at ALL, and there will BE no associated sales.

Thank you for your time.

Very sincerely yours,


David & Kristie MacNeil

Kristie MacNeil is a Board Member of SBSIA

Incoming Chair of BIA Claims New LLC Tax "will not put New Hampshire LLCs at a Competitive Disadvantage" Do You Agree?

CORRECTING MISUNDERSTANDINGS ABOUT THE NEW LLC INTEREST AND DIVIDENDS TAX

By Richard A. Samuels

In the waning moments of the 2009 New Hampshire legislative session, the legislature adopted a new revenue generation measure, providing for taxation of certain distributions from limited liability companies to New Hampshire owners. The law will subject the recipient of the distribution to reporting it as a dividend under the New Hampshire Interest and Dividends Tax.
The failure of the legislature to hold public hearings and to fully consider the tax proposal resulted in rushed, sketchy and unclear legislation, and the current public fury over the extension of the I&D tax to LLC and partnership distributions is largely a product of that process. It may well be that many legislators did not fully understand the tax when it was adopted. Nonetheless, it is clear that significant misunderstandings and even misinformation about the tax has been receiving a lot of play in the media.

Prior to the adoption of the new tax law, the New Hampshire Business and Industry Association and the New Hampshire Society of Certified Public Accountants requested clarification from the Department of Revenue Administration as to what the tax would and would not reach. The Department, which had been the source of the legislature’s last-minute inclusion of the tax in the budget bill, provided clarification in the form of detailed letters to the BIA and the CPA Society. The Department has not yet finalized the adoption of administrative rules that are necessary to determine exactly what distributions will and won’t be taxed. However, based on that pre-adoption clarification process, we believe that the following statement of what the tax was and was not intended to reach reflects the intent of the legislature and the Department:

The law is not a new tax. Rather, the change is intended to subject “distribution income” that resembles dividend income to an existing tax, New Hampshire’s Interest and Dividends Tax.
As the Governor has stated, the tax is intended to place businesses that operate as corporations on a par with businesses that operate as limited liability companies. More precisely, the objective of the law was to tax distributions made by limited liability companies and partnerships to their owners to the same degree—and only to the same degree—that dividends paid by corporations to shareholders are taxed as dividends.
The tax will apply to recipients of LLC or partnership distributions, regardless of where the LLCs or partnerships making the distributions are located or under which state’s laws they are formed.
Payments made to owner-employees of LLCs and partnerships that constitute compensation for the services of the owner-employees of the business are not intended to be taxed, any more than compensation paid to shareholder-owners is taxed. The uncertainty over what deductions will be allowed as “reasonable compensation” by the Department of Revenue Administration is a related and significant problem.
We believe that the majority of New Hampshire LLCs, as well as the majority of New Hampshire corporations, are small businesses that do not make distributions to owners in the nature of taxable dividends, so those businesses simply will not be affected by the tax.
Much of the confusion surrounding the new tax is understandable. It is easy to say that LLCs and partnerships should be placed on the same footing as corporations and that distributions or dividends to owners of both should be subject to equivalent taxation under the New Hampshire Interest and Dividends Tax. However, because partnership accounting and partnership tax (LLCs are taxed as partnerships) is very complicated and differs significantly from corporate taxation, figuring out how to treat distributions made by those entities in the same manner as dividends paid by corporations is very complex. Our hope is that the Department of Revenue Administration’s rule-making process will sort that out. Assuming that the rules are adopted so as to effect what we believe to be the law’s intent, we do not believe that the tax will spell an end to New Hampshire LLCs, will not be unfair, and it will not put New Hampshire LLCs at a competitive disadvantage to LLCs operating in other states.

BIA Says LLC Tax "best the business community could hope for"

In a letter to Legislators dated June 30, 2009, BIA President Jim Roche expresses BIA's endorsement of the 2010-2011 budget which included the new LLC Tax: "at the end of the day, our support of the budget reflected our belief that it was the best the business community could hope for."

To see the complete letter please email pkaroutas@comcast.net