FISCAL NOTE

Date Requested: February 01, 2019
Time Requested: 12:19 PM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
2732 Introduced HB2807
CBD Subject:


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 provide a reducing modification to the West Virginia adjusted gross income of a shareholder of a Subchapter S corporation engaged in banking business in this state and making the modification retroactive with respect to tax years beginning on or after January 1, 2019. The proposed bill would provide an additional modification reducing the West Virginia adjusted gross income for shareholders of S corporations in the banking business for tax years beginning on or after January 1, 2019. The shareholders proportional share of all items of income, loss, deduction or credit of the S corporation can be further reduced in the calculation of their West Virginia adjusted gross income by the percentage of the S corporations’ assets that are the following: • Obligations or securities of the United States, West Virginia and any political subdivision or authority of West Virginia • Investments or loans primarily secured by mortgages, or deeds of trust, on residential property located in West Virginia • Loans primarily secured by a lien or security agreement on residential property in the form of a mobile home, modular home or double-wide located in West Virginia. According to our interpretation, passage of the bill would reduce General Revenue Fund collections by roughly $1.1 million in FY2020. The provisions of this bill are similar to existing provisions for financial organizations subject to the Corporation Net Income Tax. However, taxpayers subject to the Personal Income Tax are able to directly reduce their taxable income through a subtraction of any income due to tax-exempt federal obligations and State obligations interest. C-corporations calculate their deduction for tax-exempt interest only by way of the asset allocation formulas as generally outlined in the bill. The provisions of this bill would provide qualifying shareholders of financial organizations organized as an S-corporation with a double tax modification for tax-exempt interest. Additional administrative costs incurred by the State Tax Department would be $45,000 in FY2020 and $20,000 in each of the fiscal years thereafter.



Fiscal Note Detail


Effect of Proposal Fiscal Year
2019
Increase/Decrease
(use"-")
2020
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 0 45,000 20,000
Personal Services 0 20,000 20,000
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 0 0 0
Other 0 25,000 0
2. Estimated Total Revenues 0 -1,100,000 -1,100,000


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


The proposed bill would provide an additional modification reducing the West Virginia adjusted gross income for shareholders of S corporations in the banking business for tax years beginning on or after January 1, 2019. The shareholders proportional share of all items of income, loss, deduction or credit of the S corporation can be further reduced in the calculation of their West Virginia adjusted gross income by the percentage of the S corporations’ assets that are the following: • Obligations or securities of the United States, West Virginia and any political subdivision or authority of West Virginia • Investments or loans primarily secured by mortgages, or deeds of trust, on residential property located in West Virginia • Loans primarily secured by a lien or security agreement on residential property in the form of a mobile home, modular home or double-wide located in West Virginia. According to our interpretation, passage of the bill would reduce General Revenue Fund collections by roughly $1.1 million in FY2020. The provisions of this bill are similar to existing provisions for financial organizations subject to the Corporation Net Income Tax. However, taxpayers subject to the Personal Income Tax are able to directly reduce their taxable income through a subtraction of any income due to tax-exempt federal obligations and State obligations interest. C-corporations calculate their deduction for tax-exempt interest only by way of the asset allocation formulas as generally outlined in the bill. The provisions of this bill would provide qualifying shareholders of financial organizations organized as an S-corporation with a double tax modification for tax-exempt interest. Additional administrative costs incurred by the State Tax Department would be $45,000 in FY2020 and $20,000 in each of the fiscal years thereafter.



Memorandum


The stated purpose of this bill is to provide a reducing modification to the West Virginia adjusted gross income of a shareholder of a Subchapter S corporation engaged in banking business in this state and making the modification retroactive with respect to tax years beginning on or after January 1, 2019. The proposed bill has some issues with the wording. The bill uses the word “taxpayer” when it probably means the “S Corporation” when referring to the total assets. The bill states in §11-21-17a how the modification will adjust “West Virginia adjusted gross income”, however, in §11-21-17a, it states that the modification must be used to determine the taxpayer’s West Virginia adjusted gross income, which can cause confusion. The bill does not make it clear that the modification under the new §11-21-12j should also be excluded from the gross receipts factor for S Corporations like it is for financial institutions that are C Corporations. The bill defines S Corporations entitled to the modifications as those engaged in banking under §31A-1-2(e), as opposed to those that would otherwise meet the definition of financial organizations under the Corporation Net Income Tax and, therefore, be eligible for the special apportionment under W. Va. Code §11-24-7b. The bill is unclear why the bill is only for “shareholders of S Corporations” as opposed to any taxpayer that would qualify under the Personal Income Tax Article. Because it is so strictly written, partnerships will not be able to take the modification, but it is unclear why they should not be permitted to do so. Also, the focus on the shareholder may add some confusion as it is unclear how a shareholder would produce the necessary documentation to support taking this modification, such as residential loan information. This modification may need to be stated on the Pass-Through Entity Return to document what the shareholders are entitled to take. The bill title does not indicate the internal effective date of January 1, 2019.



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