With the passing of April 26, 2018, House Bill (“HB”) 487 became law. The bill is effective immediately, unless other effective dates are noted. This bill includes most items from the original tax reform House Bill 366, with added technical corrections, as well as some key additions – thereby, effectively replacing HB 366. Following is a summary of key provisions of HB 487:
Individual Income Tax:
- Incorporates changes made to federal tax code under the Tax Cuts and Jobs Act that was enacted in December 2017, with exceptions. HB 487 decouples from the federal act in that it does not adopt the increased expensing and depreciation provisions, nor the pass-through income deduction.
- With tax years beginning on or after January 1, 2018, the prior graduated tax rates of 2 to 6% will be replaced with a flat rate of 5%.
- Taxpayers will no longer receive a personal credit of $10 per person.
- Mortgage interest and charitable contributions will be the only itemized deductions permitted.
- Health insurance premiums, including long-term care, will no longer be permitted as a deduction to adjusted gross income.
- The pension income exclusion of $41,110 is reduced to $31,110.
Corporate Income Tax:
- Incorporates changes made to federal tax code under the Tax Cuts and Jobs Act with exceptions. HB 487 decouples from the federal act in that it does not adopt the increased expensing and depreciation provisions.
- The deduction for domestic production activities is eliminated.
- With tax years beginning on or after January 1, 2018, the prior graduated tax rates of up to 6% will be replaced with a flat rate of 5%.
- The current three-factor apportionment formula for companies doing business in multiple states is replaced with a single-factor apportionment formula for most companies. The sales factor for service entities will be computed based on market-sourcing rather than the cost of performance approach currently used.
- Multi-state corporations will be required to file a combined return for tax years beginning on or after January 1, 2019, unless electing to file a consolidated return with the same group as it files for federal income tax purposes.
- Property tax on inventory remains, but a non-refundable credit is granted against income tax for inventory tax timely paid. This income tax credit is phased in at rate of 25% per year until the credit reaches 100% in 2021.
- Further clarifies the exemption from property tax for custom software.
Sales and Use Tax:
- Sales and use tax is imposed on the following for transactions occurring on or after July 1, 2018:
- Labor and services associated with the repair, installation and maintenance of taxable tangible personal property, includes exemption for those associated with tangible personal property used directly in manufacturing and industrial processing;
- Extended warranties;
- Landscaping and lawn care services;
- Janitorial services;
- Small animal veterinarian services;
- Fitness and recreational sports centers;
- Industrial laundry services;
- Dry cleaning and laundry services;
- Linen supply services;
- Pet grooming and boarding services;
- Non-medical diet and weight reducing services;
- In door skin tanning services;
- Limousine services;
- Admissions, including but not limited to campsites, campgrounds, recreational vehicle parks, bowling centers, skating rinks, health spas, swimming pools, tennis courts, weight training facilities, fitness and recreational sports centers, golf courses and country clubs.
- Repeals sales tax exemption for pollution control facilities for transactions occurring on or after July 1, 2018.
- Clarifies definition of “prewritten computer software.”
- Tobacco tax increased 60 cents to $1.10 per pack.
- Imposes floor stock tax on cigarettes.
HB 487 included additional sections related to credits, incentives and administrative changes.
The Department of Revenue is now working on implementation of HB 487, including developing guidance and regulations.
Contact us if you would like to discuss the impact of these provisions on your situation.