SPECIAL REPORT: The biggest tax you never knew about

| 11/11/2003

You may never have heard of the minimum corporate tax, but you’ve always owed it, and now, some states want it paid.

Truckers stopping at weigh stations are used to getting the once-over from state officials. But last fall in New Jersey, they got a little more than they bargained for.

State officials, having checked their paperwork, told one group of the truckers at a weigh station to pull aside and shut down. It turned out whoever owned those trucks owed hundreds of dollars to the state.

Those truckers, and many since, thought they were being hit with a new and expensive tax. But the fee they were charged has been on the books for decades. It may be the biggest tax you’ve never heard of.

It’s called the minimum corporate tax, and although many have never paid it before, some truckers could owe thousands of dollars to states across the country as budget-crunched officials pick up enforcement of the tax.

What is the minimum corporate tax
New Jersey, like many states, has a long-standing regulation that every corporation that does business must register with the division of taxation. Key to whether truckers have to register with the state is whether they meet that state’s definition of “doing business” there.

“We consider transportation companies to be doing business in New Jersey if they pick up or drop off items of any type at any location within New Jersey,” said Tom McDonald, acting chief of the Special Projects Branch in the New Jersey Division of Taxation. “We do not consider them to be doing business if they get on the turnpike in Delaware and drive through to New York and never stop.

“But if they pick up or drop off at a site in New Jersey … that’s what we consider doing business.”

Once it is determined that a company or individual – either sole proprietor or self-employed – is doing business, and they have registered, the state then requires that they pay “any appropriate tax, if any,” McDonald said. Few would owe any income tax – “It would be so small, it wouldn’t be worth the paperwork,” he said – but some will owe the minimum corporate tax – essentially a fee for the right to operate in the state.

Every state has a “nexus,” or a condition that if met, triggers the minimum corporate tax, Gail Toth, president of the New Jersey Motor Truck Association, said.

In some states, such as New Jersey, it is one pick up or drop off; in others, it’s a percentage of the company’s income that is earned in that state, or a certain dollar amount earned in that state; for others, it may be a number of miles a truck travels in that state.

“The criteria changes,” said Frank M. Leonard, a Clarksburg, NJ, CPA who specializes in servicing small and medium-sized businesses in the transportation industry. “Some states have 40 drops or picks, some states do it on a facts and circumstances type survey.”

Sole proprietors or self-employed truckers would not have to pay the minimum tax in New Jersey, McDonald said, even though they still have to register as doing business. The same is true of LLC businesses.

Leonard said that is true of most other states as well.

“If all the truckers in the country were registered as sole proprietors, we probably wouldn’t be getting any money from any of them,” McDonald said.

The minimum corporate tax comes into the picture only for those truckers and trucking companies who have incorporated. If you are operating under your own authority and you are incorporated, this applies to you.

Who owes and how much
Complying with the tax is not cheap. Land Line found state fees ranging from as little as $200 to over $1,000. Leonard said incorporated truckers should budget between $500 and $1,500 in every state where they meet the standard of “doing business.”

Till a short time ago, the tax in New Jersey was at worst a small burden. The minimum was $200. But that all changed just this year.

McDonald said the minimum was raised during the last legislative session, bringing the tax to $500. In part, that increase was due to the budget problems that have hit New Jersey and most other states.

“When we had a budget problem, the legislators sort of looked at all our taxes, and what they found and was announced was that 30 of the largest companies in New Jersey paid the minimum tax of $200 because of all kinds of tax loopholes and all sorts of other things,” McDonald said.

The state, trying to make the tax more equitable, responded by raising the minimum tax to $500 and closing some of those loopholes.

Unfortunately, for those owner-operators who are incorporated, that means a $300 yearly tax hike to do business in the state.

But on the upside, McDonald said most truckers would never pay more than the minimum tax. Any amount of tax over the minimum is figured based -- much like other taxes truckers pay -- on the percentage of a trucker’s total mileage that is run in New Jersey. Few would run enough miles in the Garden State to generate a larger bill.

Pennsylvania does not have a minimum tax, Leonard said, but any incorporated trucker who had “allocatable net income” generated in that state would owe, with the amount based on the mileage the trucker traveled in that state.

Many states use a questionnaire to determine whether a trucker meets the standard and has to pay the minimum corporate tax.

“These questionnaires are often 30, 40, 50 questions and go into detail as far as exactly what it is that your company does in the state,” Leonard said. “To give you an example, they may want to know if you employ any people in the state. Do you regularly make drops and picks in the state? How many times a year do you come to the state? Do you have employees who reside in the state?

“Based on how you answer those questions, they make a determination whether or not you fall under the auspices of corporate taxation,” he said.

Some truck drivers might be tempted to avoid the tax, thinking they are too small to be noticed by large state bureaucracies. But if truckers think they can run under the radar on this one, they’re making a mistake, Leonard said.

“With the IFTA reporting, states have access to the IFTA database,” he said. “And if you’re a licensed ICC carrier, you file the IFTA returns.”

That means that state can determine if you’ve run miles in their borders. Based on information in the IFTA reports, a state has the right to send you one of its corporate tax questionnaires. And that means they can tell if you owe them money.

Teaching an old tax new tricks
In the ‘90s, state budgets were flush, and few states enforced the minimum corporate tax on smaller businesses such as one-truck operations if those trucks did little business in the state.

Now, with shrinking revenue and ballooning deficits in nearly every state, Toth said, officials are scrambling for every penny they can get.

“This is what happens when you have billions of dollars in a state deficit – you pull out all the rules that you’ve never applied and you start applying them to people,” Toth said. “All these laws have been on the books for 50 years and they never applied them.” Once they discovered how many companies were not paying the minimum corporate tax, “It’s like, oooohhh, found money.”

Leonard confirmed that enforcement of the tax is up, and he has heard about it from a number of truckers.

“I believe it’s a direct extension of the states’ looking for revenues,” he said. “Most states are running in a deficit position. We’re all familiar with California, but there’s a great number of other states that have budget deficits, and they’re looking for revenues.

“I believe that it has somewhat of a cascading effect” – meaning that once one state starts aggressively enforcing the tax, other states are likely to hear about it, and will probably follow suit.

New Jersey is one of those states facing a budget crunch. But McDonald said New Jersey’s effort to step up collection of the tax from out-of-state businesses started in 1996, long before the budget crisis began.

“In New Jersey, about five or six years ago, we formed a special projects section to look at all types of industries coming into New Jersey,” McDonald said. “Some of our New Jersey vendors called and said ‘you know what, our competitors are coming in from out of state and putting us out of business because they’re not filing the same taxes as we are.’ Our job was to create a level playing field.”

Since the task force was formed, it has examined a number of industries that are doing business in the state but not paying the minimum corporate tax. Furniture companies, used car dealers and others have been the target of investigations, and eventually enforcement efforts.

“I’ve asked my people who work for me to find all the areas where out of state vendors are coming into New Jersey and doing business where we may not be getting the appropriate revenue,” McDonald said. “They identified transportation companies as one of those industries. By no means is that the only one.”

The first major check into a transportation company was made in 2002, setting off a buzz throughout the trucking industry. Organizations such as OOIDA and Toth’s group have received a flood of complaints.

The state officials who enforce the tax do not have the power to pull a truck over while it’s moving down the highway, Toth said. However, they could check trucks that were already stopped at weigh stations. And that, she said, is where truckers first encountered the enforcement effort.

At the first stops, conducted at weigh stations in New Jersey, trucks were stopped and checked to see if they were picking up and delivering in the state’s boundaries. If they were, officials then checked to see whether they were on a list of companies registered to do business in the state. If they were not on the list, the trucker was told to park, and officials then called the truck owners to inform them they owed the minimum corporate tax.

“We started getting calls, mostly from out-of-state; our guys are already registered in New Jersey,” Toth said.

Those early enforcement efforts in transportation sparked a deal for a voluntary amnesty program late in 2002.

‘Voluntary compliance’
New Jersey’s brief amnesty program lasted from November 2001 to January 2002. Truckers and trucking companies who applied during that time were allowed to pay this year’s tax and three years’ previous.

The program was a success, Toth said, with a significant number of truckers and trucking companies signing up with the state.

Although the amnesty is over, McDonald said the state was still working to lessen the impact on truckers who come forward through the department’s “voluntary compliance” program.

If a trucker comes forward under New Jersey’s voluntary compliance, the state will collect the current year’s taxes, and go three years back. Otherwise, the state can go back “as long as they’ve been coming here.” In addition to back taxes, truckers who do come forward also face a 5 percent penalty. However, the state is waiving a 30 percent late filing and late payment penalty if truckers voluntarily come forward.

“Most states have voluntary disclosure procedures,” Leonard said. “If you voluntarily come forward, they will often limit the number of years that they will go back on, they will often abate or substantially reduce all late charges or interest, and by doing so, they will not often go back four, five or 10 years or more in some cases.”

Toth said she did not know how many truckers or trucking companies had either voluntarily complied or were caught by state officials after the amnesty ended. However, state officials say that program has been a success as well.

But that does not mean that all is well in the state of New Jersey.

Truth and Consequences
McDonald said that stricter enforcement may have a direct effect on trucking in New Jersey -- many companies that make a small number of trips into the state may decide to no longer do business there.

“I’ve had people tell me I only come twice, so I don’t know if it’s worth it to come,” McDonald said. “Obviously, somebody has to make the decision, am I coming in for the $500? They have to make that business decision.”

However, the decision may be different for larger firms.

“What we’ve found is that companies who are only coming in maybe three to 10 times, they might not come in any longer. But if somebody’s coming in 25 or 30, they’ll now come in 40 or 50.”

McDonald said no one had complained to his department that the tax discriminated against smaller operators. And he discounted the idea that the trucking industry will abandon his state.

“Every industry that I’ve ever talked to, every industry that we say has to pay tax tells me they’re never going to come to New Jersey again,” he said. “And after a while you realize that, well, how can I let you operate and not make you pay the same tax as my own in-state constituents.”

Owner-operators who are leased to a carrier may not feel the effects of the tax at all. Toth said that if trucks were leased, the tax would most likely be applied to the carrier since their name is on the bill of lading, and therefore, they’re the ones “doing business” there.

Toth said she was not aware of any trucking company that stopped delivering to New Jersey because of the law. That’s because “every state requires it. This is nothing new ... any accountant will tell you that.” Those who have not registered, she said, likely didn’t know about the law, received legal or accounting advice, or have decided to “fly under the radar.”

“The bottom line is this is nothing new, every state has it. Before you know it, they’re all going to be going after us because those guys all talk,” Toth said. “Drivers doing business in interstate commerce should make sure if they’re doing business” that they have paid the tax.

For years, truckers have been advised to incorporate as a way to protect themselves and their personal assets. Now that enforcement of the minimum corporate tax is picking up, that may change.

In fact, one accountant told Land Line that the tax could virtually wipe out the advantages of incorporating.

But Leonard said there are alternatives.

“I think that that advice [that truckers should incorporate] could be somewhat dated in light of the popularity of limited liability companies, or LLCs,” he said. “Many states recognize what is known as a one member LLC.

“On a small business level, a single member LLC would escape all of the minimum corporate tax requirements out there, because by definition, an LLC is not an incorporated entity.”

For those truckers who do face the tax, Leonard said they should look at the laws in every state where they now operate and determine whether they meet that state’s requirements for paying the tax.

After that, they should seek out that state’s voluntary compliance program.

“Look in the states you operate in, have an intermediary contact those states, such as a tax accountant, and find out what the procedures are for getting on the tax rolls without any further penalties or late charges,” he said.

Truckers should remember two important aspects of the minimum corporate tax situation.

First, there is no statute of limitations for nonfiling. That means that a state can research as far back as IFTA records go to find people who owe and have not paid. Since states have the right under the law to collect back taxes up to 10 years into the past, some truckers could face incredibly high tax, penalty and interest costs.

“If you don’t have complete records, they have the right to make an arbitrary assessment based on whatever information they have available.

Second, Leonard said that many states do have a statute of limitations on taking a tax credit for taxes paid in other states. So if a trucker did not take advantage of voluntary compliance, he could face a decade’s worth of back taxes, and yet only be able to take a credit for a small part of that against his taxes in his home state.

A little relief
Truckers facing heavy tax burdens from other states may find some relief from that weight at home.

“The smaller company’s home state will offer a credit for state taxes paid to other states,” Leonard said. “As an example, if you are a smaller trucking company with a taxable income of $100,000, and your state has an 8 percent tax rate, that would result in an $8,000 state tax to your home state.

“If, however, you’re paying four other states the equivalent of say $6,000 in tax, you may be eligible for a credit somewhere of up to the amount of tax paid to the other states.”

“So while it increases the administrative headaches and compliance headaches of a small business, there is relief out there.”

If truckers can take heart from anything, it’s that they’re not being singled out, either in New Jersey or other states that have stepped up enforcement so far.

“They’re not just going after trucks, they’re going after everyone,” Toth said. “They’ve even showed up at warehouses, wanting everyone to tell who they’re storing freight for.”

However, as states continue to struggle with budget crises, Toth said she expected more and more truckers would have to contend with the minimum corporate tax. Already, she said, “Pennsylvania and New York City are doing the same thing; we understand some other states will be doing it as well.”

“This is going to spread like wildfire because of the state budget deficits,” Toth said.

--by Mark H. Reddig, associate editor

Mark Reddig can be reached at mark_reddig@landlinemag.com.