Corporate Close-up: Dead on Arrival - Vermont’s Digital Business Entity Franchise Tax


There is an unusual state tax that you’ve likely never heard of because, according to the Vermont Department of Taxes, no one has paid any tax on it during the six years of its existence.

The Vermont Business Digital Business Entity Tax is a franchise tax that companies may elect to pay in lieu of the corporate income tax, but so far no one has made the election, and it likely is not advantageous for any company to do so. “Since this provision of law has gone into effect in 2010, no entity has elected to pay it,” Jeff Dooley, Lead Tax Policy Analyst for the Vermont Department of Taxes, told Bloomberg BNA on Aug. 15.

The Digital Business Entity Franchise Tax took effect Jan. 1, 2010. It’s a 0.02 percent tax of the current value of tangible and intangible assets, or a fixed dollar amount depending on the amount of authorized capital stock of a digital business entity doing business in the state.

The definition of a digital business entity is extremely narrow: an entity that only owes Vermont state taxes due to web page or internet site maintenance, but does not have any other Vermont property, payroll or sales liability for the tax year.

“We have very active tax practice with wide range of high-tech clients and no one has ever inquired about the Digital Business Tax, nor have I had occasion to consider whether it may be advantageous to one of our clients,” Roger Prescott, Director at Downs Rachin Martin PLLC's Burlington office, told Bloomberg BNA. 

To complicate the situation, the Digital Business Entities Franchise Tax is supposed to be reported and paid in the same manner as the state corporate income tax, but neither the Vermont Department of Taxes website nor FORM CO-411, Instructions to the Vermont Corporate Income Tax Return, offer guidance on how to pay the franchise tax. “Because no corporation has ever elected to pay the tax, the Department has not produced any primary sources on this tax,” Dooley explained.

The actual liability a business can have under the Digital Business Entity Franchise Tax is between $250 and $500,000. The corporate tax rate for 2016 is between 6 percent and 8.5 percent. With that type of liability on the line, it’s easy to see why a company that could opt to pay a lower corporate income tax would do so.

For now, it looks like this ghost of a state franchise tax will haunt the Vermont Statutes until the state legislature puts it to rest once and for all.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Have you ever heard of the Vermont Digital Business Entity Franchise Tax, and do you think it should remain in the Vermont Statutes? 

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