Bill Text - SB168 (2012)

Conforming the interest and dividends tax to federal tax definitions.


Revision: Jan. 5, 2012, midnight

SB 168-FN – AS AMENDED BY THE SENATE

03/09/11 0492s

2011 SESSION

11-1051

09/04

SENATE BILL 168-FN

AN ACT conforming the interest and dividends tax to federal tax definitions.

SPONSORS: Sen. Luther, Dist 12; Sen. Bradley, Dist 3; Sen. White, Dist 9; Sen. Lambert, Dist 13; Sen. Odell, Dist 8

COMMITTEE: Ways and Means

ANALYSIS

This bill revises the interest and dividends tax to apply to all interest and dividends reported to the federal government by all resident New Hampshire individuals in order to simplify and modernize the interest and dividends tax rules.

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Explanation: Matter added to current law appears in bold italics.

Matter removed from current law appears [in brackets and struckthrough.]

Matter which is either (a) all new or (b) repealed and reenacted appears in regular type.

03/09/11 0492s 11-1051

09/04

STATE OF NEW HAMPSHIRE

In the Year of Our Lord Two Thousand Eleven

AN ACT conforming the interest and dividends tax to federal tax definitions.

Be it Enacted by the Senate and House of Representatives in General Court convened:

1 Purpose. The legislature finds that:

I. Good tax policy requires clear tax rules that reflect modern business and tax practices, provide taxpayers with simple and clear guidance, encourage compliance, and enhance the competitiveness of our economy.

II. The strength of New Hampshire’s economy is based on attracting and growing small businesses that create good jobs and growth, and the state’s tax system should provide clear rules that encourage and enhance the state’s reputation as a leading jurisdiction for the creation and growth of small businesses.

III. The interest and dividends tax law was originally enacted in 1923 and its provisions do not reflect modern economic and legal practices.

IV. This act will reform, simplify, and modernize important interest and dividends tax rules that apply to small businesses and their owners, will reduce tax audits, and restore New Hampshire’s ability to encourage small business growth and the good jobs these businesses create.

2 Taxation of Interest and Dividends; Imposition of Tax. RSA 77:1 is repealed and reenacted as follows:

77:1 Imposition of Tax. A tax is imposed at the rate of 5 percent upon the interest and dividend income of every taxable individual.

3 New Section; Taxation of Interest and Dividends; Definitions. Amend RSA 77 by inserting after 77:1-a the following new section:

77:1-b Definitions.

I. “Taxable individual” means any individual who is an inhabitant or resident of this state for any part of the taxable year.

II. “Dividend” means any item of federal gross income which is treated as a dividend under the provisions of the United States Internal Revenue Code.

III. “Interest” means all amounts treated as interest under the provisions of the United States Internal Revenue Code, except interest from notes or bonds of this state and notes and bonds of any political subdivision of this state.

4 Reference Change. Amend RSA 77:18, III to read as follows:

II. At the same time the return is filed, as required by paragraph I of this section, every [taxpayer as defined in RSA 77:3] taxable individual as defined in RSA 77:1-b, I shall, in addition, file a declaration of its estimated tax for its subsequent taxable period; provided, however, that if the estimated tax is less than $500, a declaration need not be filed; and provided further that a declaration shall be filed at the end of any quarter thereafter in which the annualized estimated tax exceeds $500.

5 Reference Change. Amend 77:4-b to read as follows:

77:4-b Interest and Dividend Income of Employee Benefit Plans and Tax Deferred Investments Not Taxable. [Notwithstanding any provisions of RSA 77:4 to the contrary,] Interest and dividend income received by an employee benefit plan as defined by the Employee Retirement Income Security Act of 1974, section 3, or any successor act enacted for the purpose of regulating employee benefit plans, or an individual retirement arrangement, Keogh plan or any other arrangement pursuant to which payment of federal tax on the income thereof and of the plan sponsors, participants and beneficiaries is deferred, shall at no time be considered taxable income under [RSA 77:4] this chapter, either to the plan or arrangement or to its sponsors, participants or beneficiaries, irrespective of when or whether all or any portion of such income is accumulated or expended for the benefit of, or distributed in any form or manner to, such sponsors, participants or beneficiaries.

6 Reference Change. Amend RSA 77:4-d to read as follows:

77:4-d Dividends Earned on Certain Mutual Funds and Distributions Received on Unit Investment Trusts Not Taxable. [Notwithstanding any provisions of RSA 77:4 to the contrary,] The dividends earned by an investor in a mutual fund or the income earned or distributions received by an investor in a unit investment trust which invests solely in New Hampshire tax-exempt tax anticipation notes, bond anticipation notes and other instruments exempt under New Hampshire law shall not be taxable under this chapter.

7 Reference Change. Amend RSA 77:4-e to read as follows:

77:4-e Interest and Dividends From Funds Invested in College Tuition Savings Plan Not Taxable. [Notwithstanding any provision of RSA 77:4,] Income and distributions from any qualified tuition program as defined in the Internal Revenue Code of 1986, as amended, shall not be taxable under this chapter to the plan or to its sponsors, participants, or beneficiaries to the extent that the same is exempt from federal income taxation under section 529 of the Internal Revenue Code of 1986, as amended, as that section was in effect on July 1, 2003.

8 Reference Change. Amend RSA 77:24-b to read as follows:

77:24-b Corrections. Each taxpayer shall report to the commissioner of revenue administration any change in the amount of the taxpayer’s income [as defined by RSA 77:4] as finally determined by the United States Internal Revenue Service with respect to any beneficial interest for which the taxpayer has made a return under this chapter. Such a report shall be made not later than 6 months after the taxpayer has received notice that such change has been finally determined.

Notwithstanding any other provision of law, a taxpayer reporting a correction pursuant to this section shall be given notice by the department of any adjustment to the tax due with respect to such correction within 6 months after the filing of the report.

9 Reference Change. Amend RSA 77-A:5-b, II(b) to read as follows:

(b) The names, addresses, and federal taxpayer identification numbers of the holders of such qualified investment company and the amount, if any, of their proportional share of the income required to be included in such holder’s New Hampshire tax return [under RSA 77:4, V and RSA 77-A:4, XV].

10 Reference Change. Amend RSA 391:3 to read as follows:

391:3 Taxability. A common trust fund shall not constitute a taxable entity within the meaning of RSA 77. Each estate having a participating interest in a common trust fund shall include in its return its proportionate share of any taxable income [of the classes described in RSA 77:4,] received by such common trust fund, whether or not such income is distributed by the common trust fund.

11 Repeal. The following are repealed:

I. RSA 77:3, relative to taxable persons.

II. RSA 77:3-a, relative to limited liability companies.

III. RSA 77:4, relative to taxable income.

IV. RSA 77:4-c, relative to transferable shares.

V. RSA 77:6, relative to income from pledged property.

VI. RSA 77:7, relative to capital distribution.

VII. RSA 77:8, relative to certain non-taxable income.

VIII. RSA 77:9, relative to decedents’ estates.

IX. RSA 77:10, relative to income from trusts.

X. RSA 77:11, relative to accumulations.

XI. RSA 77:12, relative to nonresident trustees.

XII. RSA 77:13, relative to guardians.

XIII. RSA 77:14-a, relative to partnerships and limited liability companies.

XIV. RSA 77:14-b, relative to partners and members.

XV. RSA 77:14-c, relative to members of partnership or limited liability company outside the state.

XVI. RSA 77:14-d, relative to application of sections.

XVII. RSA 77:17-a, relative to small business corporation reports.

12 Applicability. Sections 2-11 of this act shall apply to taxable periods ending on or after December 31, 2011.

13 Effective Date. This act shall take effect upon its passage.

LBAO

11-1051 Amended 03/25/11

SB 168 FISCAL NOTE

AN ACT conforming the interest and dividends tax to federal tax definitions.

FISCAL IMPACT:

    The Department of Revenue Administration states this bill, as amended by the Senate (Amendment #2011-0492s), will have an indeterminable impact on state revenue in FY 2011 and each year thereafter. This bill will have no fiscal impact on state, county, and local expenditures, or county and local revenue.

METHODOLOGY:

    The Department of Revenue Administration states this bill would revise the interest and dividends tax (I&D) to apply to all interest and dividends reported to the federal government by all resident New Hampshire individuals. The Department states as only federally defined interest and dividends would be taxable to resident individuals, the largest impact would be the loss of income from the taxation of “distributions” currently achieved under the I&D tax. The Department assumes that amounts deducted on Tax Year 2009 tax returns as non-taxable and would now be taxable to the individual, for following reason codes –

        • Reason Code #6: 100% of K-1 interest or dividend income from a partnership/trust with non-transferable shares which is subject to the I&D;

        • Reason Code #7: A portion of interest and dividend income from a partnership/trust with non-transferrable shares which is not subject to I&D; and

        • Reason Code #10: Distributive share of the entity’s interest or dividend income indicated on Schedule K-1 and included in the partner, beneficiary or shareholder’s federal income tax return.

    Thus the Department states this income will be “recaptured” as taxable income under the proposed bill and analyzed for the top 120 taxpayers of the I&D tax for Tax Year 2009.

    Distributions accounted for taxable income of approximately $692,510,728 for Tax Year 2009 I&D tax returns filed by taxpayers so far. 5% of that amount would be $34,625,536 of potential lost revenue. However, if the Department uses data only from payers of the Tax year 2009 tax and apply a ration of 44.7% nontaxable amounts to total gross revenue, the tax decrease would be $19,147,921. If the Department then excludes all distribution amounts attributable to entities not taxable ($30,832,916) under this bill, the tax decrease would be $17,606,275. The tax previously paid by corporations, partnerships and trust may no longer be received. For Tax Year 2009 those entities paid $4,320,305 in I&D tax. This results in a possible combined loss of $21,926,580 ($17,606,275 + $4,320,305). The Department next analyzed the top 120 I&D taxpayers. For Tax Year 2009, these taxpayers paid $17,966,280 in I&D tax, or 22.82% of the total tax collected. The total not taxable deductions taken by the 53,780 taxpayers was $1,461,120,897, while the top 120 taxpayers took $952,354,393 (65.18%) of this amount. When reason code # 6,7 and 10 deductions were calculated for the top 120 taxpayers, they accounted for $885,796,050 of the $952,354,393 of not taxable deductions. The tax impact at 5% of adding back this income as taxable under this bill would be $44,289,802. In summary, possible losses of $21,926,580 combined with possible income from just the top 120 taxpayers could result in increased revenue of approximately $22,363,222.

    The Department states, however, that $876,355,299 of the new $885,796,050 taxable income is attributable to the top 10 taxpayers. The tax impact on these top 10 taxpayers having additional tax to pay would be $43,817,765 of the $44,289,802, as they are responsible for 98.93% of this new tax. If these taxpayers continue to pay I&D taxes and do not adjust their tax strategies, then it is possible that this bill could result in the additional revenue previously noted. However, should these taxpayers adjust their strategies so they would no longer be subject to the I&D tax (i.e. - become non-residents) then this bill could decrease state revenues by approximately $22,000,000. The exact fiscal impact cannot be determined at this time.

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