Slide 1:Maine Tax Reform Actand Governor’s Proposed 2010-2011 BudgetFrank M. Carter Tax Institute *** Sarah H. Beard Robert A. Creamer

January 8, 2010

Slide 2:Tax Reform PackagePublic Law, Chapter 382

Effectiveness has been put on hold with People’s Veto Maine Superior Court has ruled that signatures deemed valid due to Secretary of State’s delay in certification Now, all changes stayed until after June primary (unless Maine Supreme Judicial Court reverses) If veto is defeated at polls, changes effective after vote is certified and the certification is accepted by the Governor (20-30 days after primary) Not certain what will happen with mid-year changes to income tax Also not certain what will happen with changes originally supposed to go into effect before January 2010 (sales tax) or after January 2010 (leasing)

Slide 3:Public Law, Chapter 382 Highlights

Reduced income tax rate Expanded sales tax to many services Changed the way leases are taxed Increased sales tax rate on lodging (8.5%), automobile rentals (12.5%), meals, including “candy” (8.5%), liquor sold in licensed establishments (8.5%) Rate increases were originally to be effective 1/1/2010

Slide 4:Income Tax Benefits

Rate reduced from 8.5% to 6.5% 6.85% on income over $250,000 (“surcharge”) Loss of itemized deductions, standard deduction, personal exemptions Lost deductions replaced by “household credit” Resident credit phases out as income increases above $27,500 (single) or $55,000 (married filing jointly). (No credit for non-residents)

Slide 5:New Taxable Services

Amusement, entertainment and recreation services Installation, repair and maintenance services Personal property services Rental or lease of tangible personal property

Slide 6:Amusement, Entertainment and Recreation Services

5 categories: 1. Admission fees to entertainment venues and performances (various examples listed) Listed examples are NON-inclusive – Taxable event is ticket sale, but no tax on tickets sold for events occurring outside Maine What about ticket purchased outside Maine for Maine event?

Slide 7:Amusement, Entertainment and Recreation Services

2. Fees charged to participate in or entry to: miniature golf, billiard parlors, go-cart courses and paintball – Limited to these particular participant activities, other sports not taxable Skiing, swimming, golf (for example) not taxable

Slide 8:Amusements, Cont’d

Admission fees for exhibition shows (various examples listed)

Slide 9:AMUSEMENTS, Cont’d

Fees for scenic and sight-seeing excursions - Aircraft, helicopter, balloon, railroad, whitewater rafting, etc. (but excluding scenic and sight-seeing excursions on federally navigable waters) Entertainment services such as those provided by bands, comedians, etc. - Fees paid to entertainer not taxed if there is an admission charge to the event, in which case admission charge would be taxed -Tax to be paid when services are rendered

Slide 10:Amusement, Cont’d

Specific exclusions: Fees for admission to a licensed agricultural fair; Fees for health clubs or lessons in athletic pursuits; Fees for concerts, dance productions, theatrical productions, sports activities or similar events organized and performed by schools or incorporated nonprofit entities if all the proceeds are used for the charitable purposes of that school or organization Fees charged for admission in “festivals or special events” organized by governmental entities, schools or nonprofit organizations if all the proceeds are directed to support charitable purposes

Slide 11:Installation, Repair & Maintenance

All services involved in the installation, repair or maintenance of jewelry, cameras, guns, musical instruments, electronic and mechanical equipment, lawn and garden equipment, computer hardware and office equipment, vehicles and appliances (list inclusive) (Extended or optional) service and maintenance contracts for the above items Tailoring, clothing and shoe repair and furniture repair and restoration

Slide 12:“Electronic and Mechanical Equipment”

Includes many types of equipment including TVs, VCRs, audio equipment, pumps, generators, stationary engines, etc. MRS taking position that installation of real estate fixtures is not taxable - furnace, HVAC, plumbing, etc.: If installing such fixtures were taxable, contractor would need to collect sales tax on installation services even though the property installed is not subject to tax because sold as real property

Slide 13:Vehicles and Appliances

“Vehicles” per MRS includes those that carry persons or property over the highway, ATVs and snowmobiles If repairer comes to a vehicle, removes broken part, fixes part at shop and returns and reinstalls on vehicle, this is a repair to the vehicle Charge for travel time is part of service and is taxable “Appliances” is not defined – broad dictionary definition should be clarified

Slide 14:Exclusions

No tax on installation, repair or maintenance services performed on TPP used or held for use at a manufacturing facility or fabrication facility, other than TPP used in administrative support operations Underlined terms are defined

Slide 15:“Manufacturing Facility” and “Fabrication Facility”

Manufacturing facility – current definition Fabrication facility: A site consisting of at least 35 acres where primary business is performance of fabrication services and any activities associated with / in support of such services Fabrication: production of TPP for consideration for person who furnishes, directly or indirectly, the materials used in that production

Slide 16:Manufacturing or Fabrication

Exclusion is broad - no “directly and primarily” requirement Sale of forklift for use at manufacturing facility may be taxable, e.g., if used to move finished goods from storage to loading dock for shipment, but repairs would be excluded from tax But note – MRS has indicated that use (e.g., of vehicle or portable equipment) must be solely at manufacturing or fabrication facility for exclusion to apply

Slide 17:“Administrative Support Operations”

Secretarial activities and supervision of administrative support staff; Bookkeeping and accounting services; Customer assistance activities; Purchasing, receiving; Human resources activities; Executive, tax compliance and legal support activities. Example: Repair of copier used in manufacturing facility’s office is taxable

Slide 18:More Exclusions

No tax on installation, repair or maintenance of: Computer software (but entire amount is taxable if upgrades included) Special mobile equipment Aircraft Watercraft (but repair of separate motor is taxable) Truck registered in business name for commercial use (29-A sec. 504)

Slide 19:Special Exemption

Sales of “installation, repair or maintenance services” made between affiliates that are engaged in a unitary business (as defined in Maine Income Tax Law) are exempt For example, computer repair provided by subsidiary to parent nontaxable if subsidiary is “unitary”

Slide 20:Installation and Repair of Property Sold

“Sale Price” of TPP historically excluded price for labor or services used in installing, applying or repairing property sold, if “separately stated” New law deleted this exclusion Tax Committee and MRS have taken the position that this deletion imposed tax on all repair and installation labor that is provided as part of the sale, unless a specific exclusion or exemption applies

Slide 21:Installation and Repair of Property Sold, Cont’d

Result if not changed: If R sells drapes and installs for C, price for drapes and installation is taxable as part of “sale price” (under existing law, installation is excluded if separately stated) If R sells drapes to C, who hires X to install, price for drapes is taxable and installation is nontaxable because drapes are not on the list of taxable installation services (that is, tax would be avoided by buying installation services separately from the property)

Slide 22:Personal Property Services

Tax only applies to listed services, which include: Dry cleaning; Embroidery and monogramming (includes screen printing); Car washing (including interior cleaning); Pet services (exercising, training, grooming) Picture framing; Interior decoration Warehousing and storage/rental of storage units or warehouse space (but not if provided to a business; Moving services (per MRS do not include transport of merchandise from warehouse to retail location); Vehicle towing

Slide 23:Personal Property Services, Cont’d

Specifically excludes: Services performed on TPP at manufacturing/fabrication facility; Services performed on aircraft.

Slide 24:Personal Property Services, Cont’d

Numerous questions on application: Is painting interior decoration even if done by a painter hired separately from the interior decorator? Do moving services include moving a piece of equipment (say, a cash register) from one store to another?

Slide 25:Exemptions Applicable to Services:

Taxable services performed on machinery or equipment that is exempt under exemptions for: Air pollution control equipment Water pollution control equipment Manufacturing equipment R & D equipment Pine Tree Zone equipment Agricultural equipment

Slide 26:More Exemptions:

Taxable services performed on TPP located outside of Maine or when the property is brought into Maine for performance of the services, and, following the performance of the services, the seller delivers the property to a location outside Maine or to the USPS, a common carrier or a contract carrier hired by the seller for delivery to a location outside Maine for use solely outside Maine Helpful to Maine businesses engaged in repair of property for out of state owners

Slide 27:More Exemptions:

Sale of taxable service by a person that has made sales subject to sales tax during the most recent calendar year of no more than $5000 Sale to person engaged in renting or leasing TPP of TPP for lease or rental, except for property located at a manufacturing or fabrication facility Sale to a retailer of a taxable service for resale, except resale as a casual sale Sale of labor and parts used in performance of a service or maintenance contract sold on or after 1/1/10 Those used in performance of maintenance contracts sold before 1/1/10 are taxable because there was no tax imposed on the contract when it was purchased

Slide 28:Sales for Resale of Taxable Services –

Probably not a purchase for resale if: Taxable service sold at retail differs from taxable service purchased (repair of vehicle used for sightseeing excursions); or Taxable service is purchased but TPP sold (interior detailing or repair of used vehicles to be sold)

Slide 29:“Sourcing” of Services

What if service occurs across state lines, or is used in multiple states? “Sourced” to and taxable by Maine if: Service commences in Maine (e.g., moving services from Augusta to Boston, scenic tour from Portland to Conway NH) Service is first used in Maine (computer equipment repaired in Texas is returned to Maine for use)

Slide 30:Change in Tax on Leases and Rentals

Current tax scheme: 1) “True lease” generally not taxable lessor is considered the consumer and pays sales or use tax on purchase price of item leased 2) “Lease in lieu of purchase” (financing lease) treated as a sale, subject to tax In these situations, underlying economics make it clear at the outset that property will be retained by lessee/purchaser

Slide 31:Change in Tax on Leases and Rentals

Under new system: Tax on lease of TPP equal to 5% of the total amount of consideration paid by lessee under the lease All payable up-front “Consideration” includes any down payment, trade-in credit or 3rd party rebate Purchase of TPP by the lessor is excluded from tax Changes do not apply to leases of TPP for use at a manufacturing or fabrication facility – current system continues to apply (lessor pays tax on purchase price, no tax on lease payments)

Slide 32:Change in Tax Base and Acceleration of Payment

Tax base includes total lease payments for the full term of the lease (as a result, it includes finance charges and lessor’s profit in addition to lessor’s acquisition costs) Tax collected by lessor at earlier of delivery of property to lessee or first payment under lease (tax is accelerated in that it is collected in advance of payments by lessee to lessor under the lease)

Slide 33:Tax Base, Cont’d

Exception to acceleration to the extent that the full amount is not determinable, such as a lease for one year, thereafter month to month Tax collected on full amount due for determinable period (one year), then when each payment is made thereafter

Slide 34:Example

5-year lease of excavator Lessor purchases excavator for $100,000 Lease payments = $2,500 per month, for a total of $150,000 Current law: Lessor pays one time use tax of $5,000 (5% of $100k). No tax on lessee. New law: No tax on Lessor. Lessee pays tax on Day 1 of $7,500 (5% of $150k)

Slide 35:Example, Cont’d

Suppose lessee exercises an option to renew lease for an additional 5 years at the same rent. Lessee now owes an additional $7,500 of tax at the beginning of the option period. There would have been no additional tax under the old law Note the double-tax if lessor had purchased the excavator and leased it prior to 4/1/10, then released it on or after 4/1/10. No grandfather clause.

Slide 36:Sale- Leaseback Exception

No tax on sale/leaseback transaction that occurs within 90 days of lessee’s purchase of the equipment A lessee that purchases equipment and enters into a sale-leaseback within 90 days pays tax only on original purchase price (avoids tax on lessor’s profit and finance charges)

Slide 37:Other Exceptions

Casual leases, leases for re-lease If agreement requires transfer of title upon completion of required payments or upon payment of option price that does not exceed greater of $100 or 1% of required payments. (Treated as a sale, not a lease.) This exclusion covers some but not all “leases in lieu of purchase” currently treated as sales What about lease for entire useful life? (currently treated as a sale) Will this be treated as a sale or lease?

Slide 38:Lease Exceptions, Cont’d

Providing TPP along with an operator for a fixed or indefinite period of time is not treated as a lease. Operator must be necessary for the equipment to perform as designed. Operator must do more than maintain, inspect or set up the TPP.

Slide 39:Applicability of Existing Exemptions to Leases

“Sale” now defined to include “lease”, so one could take the position that if a sale of something would be exempt, the lease of that thing would also be exempt. But, can also take the position that only exemptions that specially mention a “lease” are available.

Slide 40:Early termination of Lease

No refund if the early termination is due to exercise of an option to purchase the leased property, or the lease has been terminated due to nonpayment Refund available if lease is terminated early for other reasons

Slide 41:Opportunities for Clarification

MRS or Tax Committee may be willing to include industry-recommended changes in technical or minor substantive changes bill. Taxpayers may individually or collectively by industry seek rulings or guidance letters, may be done on “blind” basis.

Slide 42:Miscellaneous Other Changes Effective January 1, 2010

Purchases by exempt charities of prepared food, rental of living quarters, rental of autos will be taxable Meals served at retirement facilities will be exempt Long distance telecommunications service for residential customers will be taxable

Slide 43:Pine Tree Zone ExpansionPublic Law, Chapter 461

As of January 1, 2010, program available statewide on a two-tier basis, with Tier 1 benefits for 10 years, Tier 2 benefits for 5 years; Tier 1 (10 years) non-York/Cumberland County locations & high unemployment areas in York/Cumberland Counties Tier 2 (5 years) all other parts of York/Cumberland Counties

Slide 44:Tax Changes in Governor’s Proposed Budget

Maine is facing a $438 million budget shortfall The Governor’s budget for fiscal years ending June 30, 2010 and June 30, 2011 addresses this in part by making several changes to Maine’s tax statutes The proposed changes affect both business and individual taxpayers

Slide 45:Apportionment factor “Throw out rule”

The Governor has proposed to change the apportionment formula applicable to income tax of multistate businesses Current law (tax years beginning 1/1/2009) - tax computed based on the total income of the multistate business is multiplied by a fraction, Maine-destination sales over total sales of the business but excluding from both the numerator and denominator sales made into states where the “taxpayer” has no nexus. (State has no jurisdiction to tax.)

Slide 46:Throw out, continued

The proposed legislation adds specific language that would require that sales by non-Maine nexus members of the unitary group destined for Maine to be included in the numerator, and limits sales to be excluded from the numerator and denominator to those destined for jurisdictions where no member of the group has nexus Example: a bricks and mortar bookstore in Maine has a non-nexus affiliate that sells books into Maine via internet. Those sales would have been excluded from the numerator under the current law, but will be included in the numerator under the proposed legislation, thereby increasing tax imposed on the bricks and mortar bookstore.

Slide 47:Amnesty Programs

The 2009 amnesty program, titled the “Tax Receivables Reduction Initiative” brought in roughly $7 million more than originally forecast The Governor has proposed two new amnesty programs in his budget, referred to as the “short-term initiative” and the “5-year initiative”

Slide 48:Amnesty Programs

Both will require the submission of an application between September 1, 2010 and November 30, 2010 Both will require taxpayers to forgo or withdraw any appeal of the tax liability at issue, and taxpayers may not later seek a refund of money paid under these initiatives Neither initiative is available to taxpayers that have been charged with a criminal violation of Maine’s tax laws

Slide 49:Short-term Initiative

Open to taxpayers with tax liabilities assessed as of December 31, 2009 Acceptance of application entitles taxpayer to a waiver of 95% of the penalties (only) that have been assessed Taxpayer must still pay the underlying tax liability, the remaining 5% of the penalties and all interest by November 30, 2010

Slide 50:5-Year Initiative

Open to taxpayers with tax liabilities assessed as of June 30, 2005 Acceptance of application entitles taxpayer to a waiver of 95% of the penalties and interest that have been assessed Taxpayer must still pay 100% of the underlying tax liability and the remaining 5% of the penalties and interest by November 30, 2010

Slide 51:Business Equipment Tax Exemption and Reimbursement

Governor’s budget proposes excluding the following property from eligibility for either BETE or BETR: “Personal property that would otherwise be entitled to exemption under this chapter used primarily to support a telecommunications antenna as used by a telecommunications business subject to the tax imposed by section 457.” [State tax on telecommunications personal property] Fiscal note accompanying budget projects this will result in $500,000 in undedicated revenue for 2010-2011

Slide 52:Maine Residents Property Tax Program

This is the “circuit breaker” program which reimburses a portion of the property taxes paid by certain households Program is currently available to single-member households with a household income of $60,000 or less and multiple member households with a household income of $80,000 or less Proposed budget would reduce these eligibility limits to $36,900 and $49,200, respectively This change is projected to bring in $5,581,932 in undedicated revenue for 2010-2011

Slide 53:Changes Affecting Municipalities

For Homestead Property Tax Exemption, the estimated reimbursement payment to be paid by the State to each municipality by August 15th will be reduced from 80% to 75%. The due date for the payment of the remaining amount of reimbursement due to municipalities will be moved from December 15th to July 15th of the following fiscal year. For the Tree Growth Tax Law, funding for the reimbursement to municipalities will be reduced by 10%.

Slide 54: Sarah H. Beard Phone: 207.791.1378 Fax: 207.791.1350 Email: sbeard@pierceatwood.com Full bio: http://www.pierceatwood.com/showbio.asp?Show=132 Robert A. Creamer Phone: 207.791.1322 Fax: 207.791.1350 Email: rcreamer@pierceatwood.com Full bio: http://www.pierceatwood.com/showbio.asp?Show=427 Pierce Atwood LLP One Monument Square Portland, ME 04101 website: www.pierceatwood.com