United States: Indiana Enacts Legislation Reducing Business Taxes

On March 25, Indiana Governor Mike Pence approved legislation that contains a number of significant changes that will affect businesses operating in Indiana over the next several years.¹ The business tax package will reduce rates for corporate taxpayers and financial institutions, ease filing requirements for business personal property taxpayers, and establish a commission to study certain issues related to business taxation and personal property tax.

Corporate Income Tax

Prior to the enactment of this legislation, Indiana corporate income tax rates had already been scheduled to gradually decrease from 8.5 percent for taxable years beginning before July 1, 2012 to 6.5 percent for tax years beginning after June 30, 2015.² With the passage of this legislation, Indiana corporate income tax rates will continue to decrease through taxable years beginning on and after July 1, 2021, when the rate is reduced to 4.9 percent. The prospective reduction in rates will be phased in as follows:

Financial Institutions Tax

Similar to the corporate income tax rate, the financial institutions tax rate had been scheduled to gradually decrease from 8.5 percent for taxable years beginning before January 1, 2014 to 6.5 percent for taxable years beginning after December 31, 2016.³

Under this legislation, the financial institutions tax rate will also drop to 4.9 percent and the prospective reduction will be phased in over several years as follows:

Sales Tax on Sales of Bulk Propane

Effective March 25, 2014, a retail merchant in Indiana engaged in the sale of bulk propane is entitled to claim a sales tax credit before June 30, 2014.⁴ The credit is equal to the sales tax paid by the retail merchant's customers after December 31, 2013 and before April 1, 2014 for the portion of the purchase price of bulk propane sales that exceeded $2.50 per gallon.⁵ The retail merchant must then provide a credit to its customers on their next purchase of bulk propane.⁶ For administering the credits, an additional collection allowance of 1 percent of the credit claimed by each merchant is available.⁷

Business Personal Property Tax

The legislation enacts several reforms in the area of business personal property tax. The newly enacted legislation will empower each county in Indiana with the option to adopt an ordinance, for assessment dates after December 31, 2015, that will exempt from taxation business personal property with an acquisition cost of less than $20,000.⁸ Additionally, if the taxpayer is exempt from taxation for the assessment date based on the value of business personal property, the taxpayer will not be required to file a personal property tax return (though the taxpayer must file an annual certification with the county assessor stating that such property is exempt from tax).⁹ This exemption will not apply to mobile homes assessed as personal property, personal property held as an investment, or certain property subject to regulation under the Indiana Utility Regulatory Commission.¹⁰

In addition to the aforementioned exemption, counties will also have the option to exempt any new business personal property from taxation.¹¹ The exemption is also effective for assessment dates after December 31, 2015. As with the $20,000 exclusion of existing business property, the exemption for new business property will not be applicable to mobile homes assessed as personal property, personal property held as an investment, or certain property subject to regulation under the Indiana Utility Regulatory Commission.¹²

The legislation contains changes to personal property tax abatements under Indiana tax law. Effective July 1, 2014, a new provision requires a county or municipality that receives remuneration from a taxpayer as a result of the taxpayer's non-compliance with a property tax abatement agreement to distribute the amount of the remuneration on a pro rata basis to each taxing unit that contains property that was subject to the abatement.¹³ Effective July 1, 2015, a new provision allows a designating body to establish an enhanced abatement schedule for personal property that may not exceed 20 years.¹⁴

Creation of Tax Commission

Finally, the legislation provides for the creation of a commission to study a broad array of issues concerning the taxation of business personal property as well as business taxation in general in Indiana.¹⁵ The commission will be required to submit a final report of its study and recommendations to the Indiana legislative council before November 1, 2014.¹⁶

Commentary

This legislation is welcome news for businesses operating in Indiana as corporate tax rates continue to drop. It is evident that the current administration is attempting to encourage businesses to look at Indiana as a business-friendly state in which to operate. With the passage of this legislation, once the rate reductions are complete, Indiana will have one of the lowest corporate tax rates in the country. Additionally, as many other states have already done, Indiana has enacted significant personal property tax reform, and based on Governor Pence's public comments, may not be the last reform business taxpayers see with regard to personal property tax. The governor sought a complete phase-out of the personal property tax,¹⁷ and to the extent current leadership in the governor's office and the legislature remains in place, a complete phase-out of the personal property tax may occur in the future. Several of Indiana's neighboring states have repealed their taxes on personal property.¹⁸

Footnotes

1 S.B. 1, Laws 2014.

2 IND. CODE § 6-3-2-1(b). The following tax rates apply to prior years: before July 1, 2012, 8.5 percent; July 1, 2012 to June 30, 2013, 8 percent; July 1, 2013 to June 30, 2014, 7.5 percent; and July 1, 2014 to June 30, 2015, 7 percent.

3 IND. CODE § 6-5.5-2-1(b). The following tax rates apply to prior years: Taxable years beginning before January 1, 2014, 8.5 percent; taxable years beginning in 2014, 8 percent; taxable years beginning in 2015, 7.5 percent; and taxable years beginning in 2016, 7 percent.

4 IND. CODE § 6-2.5-5-49.5.

5 IND. CODE § 6-2.5-5-49.5(c).

6 IND. CODE § 6-2.5-5-49.5(d).

7 IND. CODE § 6-2.5-5-49.5(e).

8 IND. CODE § 6-1.1-3-7.2(a), (j).

9 IND. CODE § 6-1.1-3-7.2(k).

10 IND. CODE § 6-1.1-3-7.2(c).

11 IND. CODE § 6-1.1-10.3. This applies to business personal property that: (i) a taxpayer places in service after the later of the date the exemption ordinance is adopted or a date specified in the exemption ordinance; and (ii) has not previously been used in Indiana before the taxpayer acquires the business personal property.

12 IND. CODE § 6-1.1-10.3(1).

13 IND. CODE § 6-1.1-12.1-12.5.

14 IND. CODE § 6-1.1-12.1-18.

15 S.B. 1, § 12(f)(1).

16 S.B. 1, § 12(g).

17 Governor Pence's 2014 Legislative Agenda, Office of Indiana Governor, Dec. 5, 2013.

18 For example, Illinois and Ohio do not have a personal property tax. Also, Michigan is phasing out its personal property tax.

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