Multistate Tax Update -- June 4, 2015

Amazon’s expansion into Ohio triggers tax on online purchases

In a May 29, 2015, joint press release, Amazon.com Inc. and JobsOhio confirmed Amazon’s commitment to significant business development in Ohio. JobsOhio is a private, non-profit organization designed to drive job creation and new capital investment in the state. The group was involved in selling Amazon on there being “no better place” to expand than Ohio.

Cleveland’s WJW characterized the plan as a “good news/bad news” situation—good news because of the expected 1,000-plus “well-paying jobs” Ohio can look forward to over the next several years; bad news because the deal also includes Amazon’s voluntary agreement to begin collecting Ohio sales tax from online customers.

Ohio Gov. John Kasich is pleased with the deal. Bloomberg quoted him as saying “[t]his is just a huge deal for us…[i]t’s going to attract a lot of people.”

Bloomberg detailed Amazon’s plan, which is to invest several hundred million dollars in Ohio in the form of data centers that will handle cloud computing and storage. The data centers are planned for three Columbus suburbs—Hilliard, Dublin, and New Albany. Amazon may also build one or more fulfillment centers in Ohio.

Additionally, Amazon’s $1.1 billion capital investment encompasses 120 full-time jobs and an annual payroll of $9.6 million over the next three years. In return, the Ohio Tax Credit Authority approved a $77 million sales tax exemption on equipment purchases at the data centers and a $4 million tax credit for new payroll. Both of these figures reflect a 15-year projection.

Some wonder whether Ohio needed to give Amazon so much in light of the fact that the state is already an attractive expansion site. Bloomberg noted that the executive director of Good Jobs First, a non-profit that tracks subsidies and promotes accountability in economic development, contends that “Ohio shouldn’t offer tax breaks to Amazon because the company needs warehouses close to customers in the state and is likely attracted by affordable electricity for data centers.” Good Jobs First’s subsidy tracker ranks the Amazon/Ohio $81 million “megadeal” second for state and local awards, behind only Texas, where total subsidies are valued at $269 million.

After Texas and Ohio, the subsidy tracker ranks Kentucky, Wisconsin, and Indiana as the next three states that gave the most subsidies to firms:

• Kentucky: 20 subsidies, totaling more than $36 million;
• Wisconsin: One subsidy (to Amazon), totaling over $10 million; and
• Indiana: Eight subsidies, totaling more than $9 million.

On the other hand, Ohio’s brick and mortar businesses are delighted that Amazon will now be on a level sales tax playing field. The Plain Dealer reported that Amazon projects it will collect between $150 million and $300 million annually in Ohio sales taxes, eliminating the pricing advantage that it has enjoyed over the years. It is “great news for Ohio,” said Gordon Gough, president and chief executive of the Ohio Council of Retail Merchants, who is happy with the prospect of Amazon coming to Ohio and playing “by the same rules as all the other retailers.”

Nebraska's abolition of the death penalty will save the state millions

As was widely broadcast last week, Nebraska lawmakers outlawed the death penalty, overriding Gov. Pete Rickets’ veto that would have kept it intact. Reuters reported that it is the first majority Republican state to do so since 1973, when North Dakota outlawed it.

Cornhuskers have been debating the issue for years. In 2013, the Sioux City Journal (Journal) revealed that the average death penalty case costs $3 million to prosecute, compared to $1.1 million for life-without-parole cases. At that time, Nebraska had spent an estimated $100 million on death penalty cases since 1976, when the United States Supreme Court affirmed its constitutionality.

Citing Nebraska Department of Corrections figures, the Journal also pointed out that it costs an average of about $36,000 a year to keep a person in a maximum-security prison. According to the Bureau of Justice Statistics, the average time from sentence to execution for all inmates 1977 and 2013 was close to 11.5 years; in 2013, the number was 15 years, six months. In Nebraska, using the 36-year average for the calculation, the state spends more than $400,000 per inmate sentenced to death.

The Death Penalty Information Center points out that Nebraska has actually only executed three people since 1976, and it currently has 11 people on death row. Thus, absent the death penalty’s abolition there, the Department of Corrections would have spent more than $4.5 million housing those men by the time of their executions.

Another cost consideration is the legal process. One of the reasons the death penalty is so expensive are the appeals, which may go all the way to the United States Supreme Court. A May 1, 2014, article on Forbes addressed the situation in several states.

For example, in Kansas, a February 2014 report of the judicial council disclosed that cases tried to a jury in which the prosecutor seeks the death penalty spent 40.14 days in court, versus 16.79 days for non-death penalty cases. Housing costs in Kansas are not inconsequential either: Prisoners incarcerated under a death sentence cost approximately $49,380 each per year to house, double the cost of general population prisoners.

A March 2014 Idaho report, "Financial Costs of the Death Penalty," divulged that:

• Of 251 defendants charged with first-degree murder from 1998 to 2013, for those who went to trial, reaching a judgment of guilty or not guilty took seven months longer for capital cases than for noncapital cases;
• The mere possibility of a death sentence triggers additional costs, including the requirement that two county public defenders represent the defendant, a mandatory review of all death sentences by the Idaho Supreme Court, and the maintenance of a “certain level of readiness” for executions; and
• About 70 percent of the additional cost associated with death penalty case comes from the trial phase; additional factors that complicate and lengthen these trials are longer and more extensive jury selection, the mitigation and sentencing processes, and additional time spent in preparation.

More generally, in California the annual cost associated with death penalty cases is $137 million compared with $11.5 million for life-without-parole cases. A 2011 study by the Death Penalty Information Center showed that since capital punishment was reinstated in 1978, the state’s capital punishment system has cost taxpayers $4 billion more than a system that has life in prison without the possibility of parole. What’s more, the study states “Californians will spend an additional $5 billion to $7 billion over the cost of a life without parole structure to fund the broken system” between 2011 and 2050.

After last week’s veto override in Nebraska, there are now 19 states plus the District of Columbia that do not impose the death penalty: Alaska, Connecticut, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nebraska, New Jersey, New Mexico, New York, North Dakota, Rhode Island, Vermont, West Virginia, and Wisconsin.

Texas lawmakers approve an across-the-board 25 percent business franchise tax reduction

At the beginning of the 2015 legislative session, Republican lawmakers in Texas had the power and the surplus funds to cut taxes, divulged The Dallas Morning News. But “months of taunts, leaks, maneuvering, and angry protests—and above all, very poor communication—took a toll” on an agreed-upon cut to business taxes. By the end of May when the dust settled, lawmakers had pulled it together. According to The Texas Tribune, the House concurred with changes the Senate made to House Bill 32 (HB 32) by a 133 to 10 vote.

HB 32 enacted certain changes that are relevant for some business filers. Effective Jan. 1, 2016, and applicable to reports originally due on or after that date, companies with revenue up to $20 million will be eligible to take advantage of the EZ Computation tax reporting option. In addition, HB 32 reduces the tax rate under this computation from 0.575 percent to 0.331 percent.

HB 32 also decreases the franchise tax rate from one percent to 0.75 percent, and for retailers and wholesalers, decreases the franchise tax from 0.5 percent to 0.375 percent. The decrease becomes effective Jan. 1, 2016. Supporters claim that reduced compliance costs and business overhead will boost economic development and investment, while also sending a message that “Texas’ business climate is the best in the nation.” Supporters attribute this status to the fact that the bill frees up nearly $1.3 billion in fiscal year 2016, which some estimate could be deployed to create 129,000 jobs and $3.4 billion in annual investment within five years.

Despite the revenue losses, analysis of the bill theorizes that there would be “plenty” of revenue to enable Texas to meet its future obligations because the current budget surplus is “not unique.” Beyond this, the rainy day fund will reach $11 billion by the beginning of the next biennium.

Another benefit of HB 32 is that it accomplishes the goal of a low and broad tax while also reducing the government’s footprint and empowering Texans to make decisions with the forgone tax revenue that are best for the economy. The Tax Foundation endorses this low, broad tax principle as one that can contribute to substantial and stable revenue because it does not favor or punish certain economic decisions, industries, products, or activities over others.

On the other hand, the bill analysis cites opponents’ argue that the $2.56 billion costs should be used to fund basic services. Pre-kindergarten education is one target area, because such investments will ultimately provide the state with a more educated workforce that will make the economy more competitive.

Opponents also argue that transportation needs additional funding. Referring to Texas A&M Transportation Institute findings, the bill analysis recognized that “delays and fuel costs as a result of congestion cost the state $10.1 billion and more than 472 million hours of travel time.” What is more, “TRIP, a national transportation research group, found that an inadequate transportation system costs Texas more than $23 billion, which includes costs from congestion, air pollution, and public safety. In other words, billions of dollars are lost every year because Texas does not properly fund its transportation infrastructure.”

In the end, The Texas Tribune article reported a compromise of sorts: “[L]eaders in both chambers eventually agreed to take…a smaller cut in rates and a provision freeing a large number of businesses from paying any tax at all.”

For additional information regarding these subjects, or any other multistate tax issues, please contact:

David M. Kall
216.348.5812
dkall@mcdonaldhopkins.com

David H. Godenswager, II
216.348.5444
dgodenswager@mcdonaldhopkins.com

Susan Millradt McGlone
216.430.2022
smcglone@mcdonaldhopkins.com

Multistate Tax Services

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.