Edmundson CPA, PLLC

Formerly Edmundson & Company, CPAs

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State Business Taxes report

The Council On State Taxation (COST) recently released its 13th annual study of state and local business taxes. The full report is available as a PDF towards the bottom of the news release. While the report refers to state and local business taxes, this post will refer to them as state business taxes.

Total Effective Business Tax Rate (TEBTR) as % of private sector Gross State Product (GSP), on (PDF) Council On State Taxation

What is different in this report?

Many state business tax rankings use only income tax rates. The COST report uses the actual total of taxes paid as a percent of the total state business taxes paid. What does this mean? The report includes not only business income taxes but also individual income taxes paid on business income, sales tax on business expenditures, business property taxes, licenses, unemployment taxes, excise taxes, severance taxes (on minerals, oil, etc.), and other business taxes.

Why does this matter?

Does a business really care what kind of tax they pay? Is it more important to pay little or no income tax at the cost of very high sales tax? Of course not. Total tax is what comes out of the business’ pocket not just one type of tax. For example, Nevada has no state individual or business income tax. So NV’s income tax rate is considered zero which would rank it at the top of any state tax ranking based solely upon rates. North Carolina has individual and corporate income taxes. However, NV businesses pay 53% of all state and local taxes while NC businesses pay only 38.8% of all state and local taxes. Further, the Total Effective Business Tax Rate (TEBTR) in NV is 5.9% while in NC it is 4.3%.

All other things being equal, even though NC has an income tax and NV does not, on average a business should prefer NC business taxes to NV business taxes.

Is COST the best state business taxes ranking?

Of course not. Every business is different and every state’s tax laws are different. Property taxes and general sales and use tax on inputs are the two largest components of state and local business taxes. However, many service business (like CPAs) have very little in property so their property taxes are low. For these businesses, income and payroll taxes become a much larger concern.

On the other hand, the rankings solely based upon income tax rates are not the best either.

What do you think, are state business taxes as a % of income a better measurement than a tax rate ranking? Please comment below.

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NC welcomes US Open with new taxes


image source: flickr no changes

Prior to June 1, 2014, when someone rented their personal residence for fewer than 15 days during a year, the rent was not subject to sales tax and any local accommodation tax. This coincides nicely with a federal tax law exempting rental income for fewer than 15 days from income tax. The federal rule is often called the “Masters rule” as people around Augusta, GA have used it for years during the Masters golf tournament. They will rent their homes to visitors for two weeks at exorbitant prices and owe no income tax on the rent.

Apparently, the NC Legislature could not control itself when it saw the U.S. Open and the U.S. Women’s Open were coming to NC this June and had to pass a bill making the rental income for fewer than 15 days subject to sales tax and any local occupancy tax (Moore County where Pinehurst is located has an occupancy tax). The tax only applies if the owner uses a real estate agent or real estate broker to handle the rental. So everyone renting through a real estate agent or broker in Moore County will see their rental go up by a total of 9.75%. The rate is made up of the 4.75% state sales tax rate, the 2% local sales tax rate and the 3% local occupancy tax rate.

But wait, the Legislature sprung this on us at the last minute. House Bill 1050 was passed and signed into law on May 29, 2014 and is effective June 1, 2014. Giving our real estate agents and brokers a whopping two days notice. One of those two days was a Saturday but perhaps that is not so bad since most real estate agents and brokers work the weekend.

Let’s see, the Legislature raises taxes and gives us two whole days to get ready for them. I bet there will be some unhappy U.S. Open visitors this year.

In case you were wondering, this new NC rule applies throughout the state. The NC Department of Revenue has a notice (PDF) about it.