State Tax Snapshot: 5 Innovative Developments in State Taxation

It would be reasonable to assume that progress in tax administration is stagnating due to reports of partisan bickering in Congress and state legislatures. But new administrative practices recently adopted by some states are examples of how certain jurisdictions are still fulfilling their roles as laboratories of democracy.

Below are 5 recent improvements to the administration of state taxes as explained by the Federation of Tax Administrator’s Verenda Smith and Jonathan Lyon. These and other development will be more fully discussed at FTA’s annual meeting in Washington, D.C. from June 17-20.

1) E-Filing. Electronically filed returns cost less for state tax agencies to process. The IRS has led the way to encouraging the electronic filing of individual income tax returns by imposing an e-filing mandate on professionals who prepare more than 10 returns. As a result of this requirement, states have seen a rise in electronically filed returns. New York has taken the e-filing mandate a step further by requiring all taxpayers who use software to prepare their returns, to file their documents electronically. At the same time, many states have eliminated the availability of paper returns.

2) Tax Refunds: Paper or Plastic? To help taxpayers lacking a bank account avoid check cashing fees and other problems, some states began issuing tax refunds in the form of debit cards in 2011. For 2012, states issuing debit cards to those without bank accounts include: Connecticut, Louisiana, Nebraska, and New York. Pros: less costly and faster than issuing a check. Those without bank accounts can avoid paying hefty check-cashing fees. Cons: there have been some reports of bank fees; debit cards are the payment of choice for identity thieves.

3) A Check Up on Hospitals’ Exempt Status. Nonprofit hospitals have traditionally enjoyed property and sales tax exemptions. But recently, the exemptions granted to these organizations have begun drawing heightened review from state tax agencies, community activists, and plaintiffs' attorneys. At issue is whether nonprofit hospitals provide sufficient levels of charity care to the community to qualify for state and local tax exemptions. To qualify for a property tax exemption in Ohio, a nonprofit health care facility must be used exclusively for charitable purposes. Some states have used this requirement as a basis for denying the property tax exemption to nonprofit health care providers. The Illinois Department of Revenue recently ruled that three nonprofit hospitals did not provide enough charity care to qualify for a property tax exemption. Illinois recently enacted legislation that establishes “charity care” standards that nonprofit hospitals must meet to qualify for property and sales tax exemptions.

4) Online Live Chat for Taxpayer Assistance. Taxpayers in Virginia can have their questions answered by tax agency representatives via the Live Chat feature on the tax department’s website.

5) There’s an App. for That. The California State Board of Equalization (BOE) is offering a free application, BOE ePay, that allows owners of most mobile devices to make payments to their BOE tax and fee accounts. To see BOE ePay in action, check out the video and find the application here:

Another application allows taxpayers to find the sales tax rate of any jurisdiction and locate their district office.

More to come…

Using Credit Card Data to Combat Tax Cheats. Third-party information reporting has been shown to increase voluntary tax compliance and improve collections and assessments for both the IRS and state tax agencies. Instead of entirely relying on the taxpayer to disclose transactions, these initiatives require information from other parties that engaged in one or more transactions with a taxpayer.

Reporting requirements imposed on credit card companies and other third-party payment issuers such as PayPal were enacted in 2008 and took effect for the 2011 tax year. Beginning in early 2012, credit card companies and other payment issuers must complete and file I.R.S. Form 1099-K, Merchant Card and Third Party Network Payments. The reporting requirements only apply when gross payments to any participating payee exceed $20,000, and more than 200 transactions occurred with that payee.

The additional data contained in the new form is likely to yield additional revenues for both the IRS and the states, which generally calculate their own tax based on federal adjusted gross income.

The new requirement is expected to combat the underreporting of income by small businesses that operate on websites such as E-Bay. The enforcement of taxes owed on online transactions is of critical importance to states, which have struggled to guard against further erosion of their tax base as more commerce continues to move online. The states are expected to receive the first batch of 1099-K reports during the first quarter of 2013.

By Steven Roll
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