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| The Business Enterprise Tax: Will You Have to Pay? David M. Law Source: Business NH Magazine On July 1, the New Hampshire Legislature passed the Business Enterprise Tax (BET). The new tax imposes a one quarter of 1 percent (.25%) tax on wages, interest and dividends paid by New Hampshire businesses. A substantial amount of the revenue generated by the BET will come from sole proprietors, partnerships, professional associations and S corporations that will be paying state taxes for the first time. Many such business organizations traditionally avoided or limited their liability under the Business Profit Tax (BPT) by distributing their profits as compensation.
Under the new tax legislation, beginning in 1993 virtually every business organization that has annual receipts of at least $100,000 or pays $50,000 or more annually in wages will be liable for BET payments.
The New Hampshire Department of Revenue Administration (DRA) plans to make filing as simple as possible for businesses paying the BET. The new tax is effective for tax years ending on or after July 1, 1993. Accordingly, businesses with a calendar year-end will pay BET for 1993. The BET forms will be attached to Business Profits Tax forms businesses are already required to submit each year.
According to a Technical Information Release published July 26, the DRA plans to conduct a series of seminars to educate business taxpayers on the new tax beginning this fall. In addition, as of this writing, the DRA was scheduled to release additional detail on its procedures with respect to the new tax.
WHY A BET
The BET evolved from the state's desire to equalize the business tax burden posed by the existing Business Profit Tax. The BPT has long been criticized because so few New Hampshire businesses make BPT payments. The New Hampshire Department of Revenue Administration has reported that only a quarter of the 60,000 or more New Hampshire businesses filing BPT returns pay any BPT at all, and a very small minority of these businesses contribute the overwhelming majority of the tax's total revenues. The BPT's high rate, 8%, also has been cited as a deterrent to attracting out-of-state businesses to New Hampshire.
Prior legislative efforts to reform the Business Profits Tax, such as limiting the compensation deductions allowable for businesses, failed to pass constitutional muster. The BET proposal, strongly supported by Gov. Merrill went outside the BPT by creating an entirely new mechanism for business taxation. The new tax legislation preserves the BPT while reducing its rate from 8% to 7.5% for tax years ending on or after July 1, 1993, and 7% for tax years ending on or after July 1, 1994.
THE BET EFFECT
Whether the BET will achieve the Legislature's goal of equalizing the tax burden borne by New Hampshire businesses remains to be seen. Certainly, many of the legislation's intended targets who are able to avoid the BPT, such as doctors, lawyers and other professionals, will not escape tax liability under the BET. Some businesses, however, due to the nature of their operations, will be particularly hard hit by the BET's taxation of interest. Specifically, businesses with leveraged inventories, such as grocery stores, automobile dealerships, furniture dealers, boat dealers, and other capital- intensive businesses with expansive and expensive inventories may face a larger tax burden.
Furthermore, by taxing wages the BET may have the unintended effect of providing a disincentive to New Hampshire employers that supply a large number of local jobs. The BET's tax on wages may encourage these businesses to reduce their labor force, further exacerbating the existing trend toward corporate downsizing.
The BET's.25% taxation on payroll, dividends and interest applies to all New Hampshire businesses having at least $100,000 in annual gross receipts. "Receipts" do not necessarily generate profits. Unlike the BPT, which taxes profits, businesses having no profits or even losing money will nevertheless be liable for BET payments. Accordingly, unprofitable businesses with large interest payments, a large labor force, or both will bear a disproportionate share of BET liability.
While this legislation creates new sources of revenue, it is not expected to increase .overall tax revenues for the state. Any revenue generated by the BET is expected to be offset by the creation of certain tax credits and the reduction and elimination of other forms of taxation. For example, the new legislation: (1) allows businesses to credit their BET payments against their BPT obligations; (2) eliminates corporate franchise fees and the savings bank tax; and (3) reduces the tax rate on the real estate transfer tax, the BPT and the communications services tax.
LOCKING IN THE RATE
The BET should not impose a significant financial burden on most New Hampshire businesses so long as the .25% rate remains in effect. The real concern remains in the Legislature's ability to increase the rate in the future. Presently, a "super-majority" three fourths vote of both the House and the Senate is required to effect an increase in the BET rate. Ironically, the Legislature could eliminate this "super-majority" requirement by a mere majority vote. Each year the Legislature is pressed to find new revenue sources. This pressure will intensify due to the expected dissipation of federal Medicare funds. Accordingly, now that the door has been opened to a new method of business taxation, New Hampshire businesses must stand ready to counteract the inevitable future efforts of the Legislature to increase the BET rate.
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