FISCAL NOTE

Date Requested: January 17, 2018
Time Requested: 10:48 AM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
2023 Introduced HB2375
CBD Subject: Taxation


FUND(S):

General Revenue Fund

Sources of Revenue:

General Fund

Legislation creates:

Decreases Existing Revenue, Increases Existing Expenses



Fiscal Note Summary


Effect this measure will have on costs and revenues of state government.


    The stated purpose of this bill is to create a program to provide tax relief to new businesses that hire West Virginia residents as at least fifty percent of their employees. The program allows new, small businesses and business owners to be taxed at an effective rate of one percent on income derived from the business and to receive a credit against business and occupation taxes and business franchise taxes equal to the amount of property tax paid during the tax year for the tangible personal property of the business (equipment, durable goods and business inventory).
    
    According to our interpretation, the provisions of this bill seek to establish two separate tax credits for a qualified “newly-established small business” for a period of up to five years. The bill defines “newly-established small business” as a West Virginia business with a business registration certificate that is less than 10 years old, employs no more than 250 employees, and has no more than $15 million in annual gross receipts. These newly created tax credits would expire December 31, 2028.
    
    The first proposed tax credit would be a credit equal to the amount of local personal property taxes paid against both State Business and Occupation Tax and Business Franchise Tax. The projected cost of this tax credit would be $0 because only public utilities and electric power generators are subject to State Business and Occupation Tax and public utilities pay property tax under a separate public utility tax category. In addition, it is unlikely that any newly established small business would be a public utility. Municipal governments generally impose local broad-based business and occupation taxes, but the proposed credit would not apply against such tax liabilities. The tax credit application against Business Franchise Tax would not apply as this Tax was eliminated effective January 1, 2015.
    
    The second proposed tax credit would allow a temporary five-year reduced tax rate for newly established small businesses. Qualified businesses would pay income tax at a rate of 1.0 percent instead of the standard rates of as high as 6.5 percent. For pass-through entities and sole proprietors subject to Personal Income Tax, the temporary lower tax rate would apply to the net income attributable to the activity of the newly established small business. In the case of corporations, the tax rate is reduced from 6.5 percent to 1.0 percent for the first five years of qualification. The reduced tax rate would effectively apply to any West Virginia business entity with less than $15 million in annual gross receipts if the business was less than 10 years old by no later than the effective date of the bill. We are unable to readily determine either the level of utilization or potential cost of this proposed special temporary tax rate reduction program. However, the compliance costs associated with the added tax calculation complexities associated with this proposal would be high relative to the potential tax savings for the qualified business.
    
    Given that there is no internal effective date for these new tax credits, the effective date would be the first taxable year beginning after the provisions of the bill go into effect or 2018 for most business entities.
    
    Additional administrative costs incurred by the State Tax Department would be $102,000 in FY2020 and $70,000 in fiscal years thereafter.
    



Fiscal Note Detail


Effect of Proposal Fiscal Year
2018
Increase/Decrease
(use"-")
2019
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 0 0 70,000
Personal Services 0 0 70,000
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 0 0 0
Other 0 0 0
2. Estimated Total Revenues 0 0 0


Explanation of above estimates (including long-range effect):


    According to our interpretation, the provisions of this bill seek to establish two separate tax credits for a qualified “newly-established small business” for a period of up to five years. The bill defines “newly-established small business” as a West Virginia business with a business registration certificate that is less than 10 years old, employs no more than 250 employees, and has no more than $15 million in annual gross receipts. These newly created tax credits would expire December 31, 2028.
    
    The first proposed tax credit would be a credit equal to the amount of local personal property taxes paid against both State Business and Occupation Tax and Business Franchise Tax. The projected cost of this tax credit would be $0 because only public utilities and electric power generators are subject to State Business and Occupation Tax and public utilities pay property tax under a separate public utility tax category. In addition, it is unlikely that any newly established small business would be a public utility. Municipal governments generally impose local broad-based business and occupation taxes, but the proposed credit would not apply against such tax liabilities. The tax credit application against Business Franchise Tax would not apply as this Tax was eliminated effective January 1, 2015.
    
    The second proposed tax credit would allow a temporary five-year reduced tax rate for newly established small businesses. Qualified businesses would pay income tax at a rate of 1.0 percent instead of the standard rates of as high as 6.5 percent. For pass-through entities and sole proprietors subject to Personal Income Tax, the temporary lower tax rate would apply to the net income attributable to the activity of the newly established small business. In the case of corporations, the tax rate is reduced from 6.5 percent to 1.0 percent for the first five years of qualification. The reduced tax rate would effectively apply to any West Virginia business entity with less than $15 million in annual gross receipts if the business was less than 10 years old by no later than the effective date of the bill. We are unable to readily determine either the level of utilization or potential cost of this proposed special temporary tax rate reduction program. However, the compliance costs associated with the added tax calculation complexities associated with this proposal would be high relative to the potential tax savings for the qualified business.
    
    Given that there is no internal effective date for these new tax credits, the effective date would be the first taxable year beginning after the provisions of the bill go into effect or 2018 for most business entities.
    
    Additional administrative costs incurred by the State Tax Department would be $102,000 in FY2020 and $70,000 in fiscal years thereafter.
    



Memorandum


    The stated purpose of this bill is to create a program to provide tax relief to new businesses that hire West Virginia residents as at least fifty percent of their employees. The program allows new, small businesses and business owners to be taxed at an effective rate of one percent on income derived from the business and to receive a credit against business and occupation taxes and business franchise taxes equal to the amount of property tax paid during the tax year for the tangible personal property of the business (equipment, durable goods and business inventory).
    
    Although the Tax Commissioner is charged with reporting this program’s effectiveness, it is the counties who administer personal property taxes. This program would be difficult to administer without additional resources and additional authority for the counties and the Tax Commissioner, particularly in the area of information sharing.
    
    The proposed West Virginia Code references cannot be called 11-13DD because this series has already been assigned to the West Virginia Farm to Food Bank Tax Credit.
    
    
    



    Person submitting Fiscal Note: Mark Muchow
    Email Address: kerri.r.petry@wv.gov