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States Expected to Keep Hiking Taxes This Year

January 13, 2011

As states face more budget deficits this year, the news coming out of state capitals lately has not been too encouraging.

The Illinois legislature passed a tax hike Wednesday, raising personal income taxes by 66 percent from 3 to 5 percent for four years, and corporate income taxes from 4.8 to 7 percent, a 46 percent increase. Governor Pat Quinn has promised to quickly sign the measure.

Meanwhile, in California, Governor Jerry Brown proposed this week to extend billions of dollars in expiring income and sales taxes, as well as vehicle registration fees, for another five years.

“That’s the big issue and trend: states need more revenue,” said Jamie Yesnowitz, a senior manager in Grant Thornton’s state and local tax practice in Washington, D.C. “States want more revenue, and they’re looking for more ways of getting it.”

Yesnowitz visited the Accounting Today offices on Wednesday, and said that many of the trends that Grant Thornton had predicted a year ago in the state and local tax arena have taken place. The firm is predicting more of the same this year in a recent alert.

That includes states finding more ways to claim “nexus” so they can collect sales taxes on transactions that occur in some way, shape or fashion within their state. They are also going after taxes on Internet sales more aggressively, using strategies such as efforts in Colorado and Oklahoma to force e-commerce vendors to disclose their sales and encourage more of their customers to self-report their purchases.

States are also expected to continue the trend toward imposing taxes on various services, especially as the U.S. economy moves more toward a service-based economy. Yesnowitz sees a push to tax an array of professional services that could well include accounting services. Taxes may be imposed on preparing taxes for a client.

Yesnowitz hopes to see the Supreme Court take up a state tax case, perhaps as soon as this year, that would clarify the 1992 decision in the landmark state tax case, Quill Corp. v. North Dakota, which found that companies needed to have a substantial nexus within a state for them to be taxed for interstate commerce. That may happen with and’s challenges to New York State’s tax laws on e-commerce sales.

Another case that might be appealed to the Supreme Court involved KFC Corp. in Iowa, according to Yesnowitz. The Iowa Supreme Court ordered KFC late last month to pay nearly $250,000 in corporate income taxes, even though the fast food chain only has franchises in the state, but no restaurants of its own.

Will the U.S. Supreme Court be interested in taking up a state income tax case? Earlier this week, the newest justice on the court, Elena Kagan, wrote her first opinion in a case involving IRS standards for which monthly expenses debtors could claim under the bankruptcy code to reduce their disposable income (see Supreme Court Rules for IRS, Against Medical Residents). Perhaps this is a sign that Kagan and her fellow justices will have enough of a taste for tax-related cases to entice them to weigh in on a sequel to Quill, whether it involves Amazon, or Colonel Sanders.

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