United States: Vermont Enacts Various Tax Provisions, Including Five-Year Consolidated Return Election Requirement

On June 5, Vermont Governor Peter Shumlin approved a measure including numerous tax provisions.¹ Effective for taxable years beginning on or after January 1, 2014, taxpayers choosing to file consolidated corporate income tax returns in lieu of separate returns must now make an affirmative election to do so, and such election is statutorily binding for at least five years. In addition, the research and development credit available for Vermont expenditures has been lowered for the 2014 tax year and thereafter from a maximum of 30 percent to a maximum of 27 percent of the amount of the federal credit. The legislation also updates the state's conformity to the Internal Revenue Code (IRC) for income tax purposes. Finally, sales tax will apply to sales of materials and supplies to contractors used to improve or repair real property and use tax will be imposed on telecommunications service beginning July 1, 2014.

Income Tax Provisions

The new law contains a provision which requires taxable corporations constituting an affiliated group electing to file a consolidated Vermont return for taxable years on or after January 1, 2014 to continue the election for five years, including the year of election.² Affiliated corporations with income allocated or apportioned to Vermont that filed federal income tax returns on a consolidated basis historically have been allowed to file a single consolidated Vermont return.³ Until this legislation was adopted, no specific election was statutorily required, but was generally made by filing Schedule BA-410 (Vermont Corporate Income Tax Affiliation Schedule) with Form CO-411 (Corporate Income Tax Return) on an annual basis. The election is not available to corporations which are part of an affiliated group engaged in a unitary business and are required to file a group return containing the combined net income of the affiliated group⁴ using Form CO-411U (Combined Report for Unitary Group).

Further, effective January 1, 2014, the available research and development tax credit against income tax is limited to an amount equal to 27 percent of the amount of the federal tax credit allowed in the taxable year for eligible research and development expenses made in Vermont.⁵ The ten-year carryforward for unused credits remains in effect. In addition, the Vermont Department of Taxes will publish annually a list of taxpayers who have claimed research and development credits.⁶ Other income tax provisions in the legislation include an increase in the aggregate available amount of tax credit for historic rehabilitation and other specified improvements⁷ and an information reporting requirement for credit card processors and third-party payment aggregators.⁸

IRC Conformity

For taxable years beginning on or after January 1, 2013, Vermont adopts the IRC as in effect for taxable year 2013 for income tax, as well as estate and gift tax, purposes.⁹

Sales and Use Tax Provisions

Effective July 1, 2014,¹⁰ the new law contains various sales and use tax provisions. The definition of "retail sale" is amended for sales tax purposes to specifically include sales to contractors, subcontractors, or repair persons of materials and supplies for use by them in erecting structures or otherwise improving, altering, or repairing real property.¹¹

Additionally, tangible personal property used to improve, alter or repair real property of others by a manufacturer or any person primarily engaged in the business of making retail sales of tangible personal property will be subject to sales tax.¹² Use tax will now be imposed on telecommunications service, subject to certain exceptions.¹³

Other sales and use tax provisions included in the law are the addition of an exemption for sales of compost and similar materials,¹⁴ an exclusion from the exemption for fuels used in a residence for retail sales of fuel sold in free-standing canisters,¹⁵ an increase in the use tax amount reportable on an individual income tax return,¹⁶ and the repeal of an exemption for materials used in certain downtown redevelopment projects.¹⁷

Other Provisions

For fiscal year 2015, Vermont will modify the amount of statewide property tax for education by decreasing the residential property tax rate from $1.10 per $100 of assessed value to $0.98. The tax rate for nonresidential property will decrease from $1.59 per $100 of assessed value to $1.515.¹⁸ Vermont will also publish the names and outstanding tax liabilities for the 100 individual taxpayers and 100 business taxpayers with the greatest unresolved income tax liabilities.¹⁹

Commentary

With the adoption of these various measures, Vermont has not made significant overriding changes to its tax code, but has managed to implement a number of more targeted initiatives. By requiring business taxpayers electing to file income tax returns on a consolidated basis to retain the election for a five-year period, Vermont has eliminated the ability of taxpayers to freely move between filing on a separate entity and consolidated basis. Elimination of this option will presumably result in an increase in taxes paid to Vermont, as taxpayers will no longer be able to simply choose a filing method each year based on whichever method minimizes their Vermont income tax liability. Also, the annual publication of the "top 100" delinquent taxpayers could inspire more compliance with the Vermont tax system.

Vermont's reduction in the amount of research and development credit available to taxpayers is interesting, as is its decision to publish annually a list of taxpayers claiming the credit. While many states continue to offer these credits, perhaps Vermont has discovered that the anticipated lucrative jobs and economic development associated with research and development activities have not manifested themselves.

Footnotes

1 Act 174 (H. 884), Laws 2014.

2 VT. STAT. ANN. tit. 32, § 5862(c).

3 Id.

4 VT. STAT. ANN. tit. 32, § 5862(d).

5 VT. STAT. ANN. tit. 32, § 5930ii(a).

6 VT. STAT. ANN. tit. 32, § 5930ii(c). The annual list will be published by January 15 for credits claimed during the previous calendar year.

7 VT. STAT. ANN. tit. 32, § 5930ee(1). Effective beginning with Vermont's 2015 fiscal year, the maximum amount available is increased to $2.2 million, rather than $1.7 million.

8 VT. STAT. ANN. tit. 32, § 5862d. This provision is effective beginning with tax year 2014.

9 VT. STAT. ANN. tit. 32, § 5824.

10 H. 884, § 70(11).

11 VT. STAT. ANN. tit. 32, § 9701(5).

12 VT. STAT. ANN. tit. 32, § 9771.

13 VT. STAT. ANN. tit. 32, § 9773.

14 VT. STAT. ANN. tit. 32, § 9701(48)-(52).

15 VT. STAT. ANN. tit. 32, § 9741(26). The exclusion also applies to transactions where a freestanding container is exchanged without a separate charge.

16 VT. STAT. ANN. tit. 32, § 5870. The amount which an individual may elect to report on a personal income tax return is increased from 0.08 percent to 0.10 percent of the individual's Vermont adjusted gross income.

17 VT. STAT. ANN. tit. 32, § 9741(39).

18 H. 884, § 50.

19 VT. STAT. ANN. tit. 32, § 3102(m).

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