LET US KNOW HOW THE TAX REFORM PROPOSAL WOULD IMPACT YOUR BUSINESS

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The Chamber needs your input on the Governor’s Tax Reform Commission’s draft bill. This proposal is intended to reform the current business franchise tax and lower property tax rates for all property owners - residential and commercial.

Click here for worksheets to determine your taxes under the proposal.

Then click here by Tuesday, April 25, to tell us your opinion of the proposal.

Below is a description of the bill.

Provisions of the proposal:
The proposed bill replaces the state franchise tax with a new margins tax.

  • A one percent tax would be applied to business revenue (as reported in the federal tax return)
  • Deduct either “cost of goods sold” OR “compensation and benefits”. If the organization chooses the compensation and benefits deduction, up to $300,000 per individual may be deducted for wage and cash compensation PLUS the cost of benefits.
  • Business entities engaged primarily in retail or wholesale trade pay a lower tax rate of ˝ percent.

The intent of the bill is to broaden the tax base by closing the “Delaware Sub loophole” that has been widely reported as a popular tax planning tool. There are a number of exemptions:

  • Small business, with total revenue of less than $300,000 are exempt. This amount is adjusted each year based on increases or decreases in the Consumer Price Index.
  • Sole proprietorships and general partnerships do not receive liability protection and are not taxed.
  • Also exempt are family trusts, passive investment partnerships and REIT’s.

The bill makes the following changes:

  • Most of the franchise tax credits in current law are limited. However, credits that are earned prior to June 1, 2006 can still be claimed as well as those agreed to by the state in writing prior to January 1, 2006 as an economic development agreement.
  • $1 increase in tobacco tax.
  • Increases sales tax collections from the sale of used motor vehicles.
  • Uses a portion of the surplus are recommended to completely compensation for the reduction in property tax revenue.
  • There is no increase or expansion of the state sales tax recommended.

School property tax rates would be reduced 17 cents in the 2006 tax year and an additional 33 cents, totaling a 50 cent reduction, in the 2007 tax year. School districts could raise the rate by 6 cents per year, but the current $1.50 cap is reduced to $1.30.