There have been several important Mississippi legislative, administrative and legal developments that individuals and businesses should note. In addition, a tax study commission appointed by Governor Barbour at the beginning of the year released its final report in September. The report proposed sweeping changes to the Mississippi state and local tax structure.
- Legislative Developments
- Administrative Developments
- III. Judicial Developments
The most notable case involving the state taxation of a Mississippi business was Blount v. ECO Resources, Inc., decided by the Mississippi Court of Appeals in 2007 but published this year. ECO Resources, Inc. is a company which maintains water and sewer systems for municipalities. The State Tax Commission audited ECO in 1999, and determined that it owed contractor's taxes under Miss. Code Ann. § 27-65-21(1)(a)(i) on several of its contracts. The contractor's tax is due when repairs are made to real property. The State Tax Commission auditor, reviewing the job titles of ECO employees, determined that 70% of the work performed by ECO was attributable to repairs of real property. Thus, 70% of the fees collected on the contracts were assessed the 3.5% contractor's tax.
ECO objected to the assessment based on job titles, and provided the auditor with job descriptions of the various employees. The auditor responded by raising the assessment to 86% of the fees collected. ECO administratively appealed the auditor's findings with limited success, paid the assessment, and then filed a refund action in the Chancery Court of Harrison County, arguing that it was not subject to the contractor's tax because the repairs were made to personal property. The Chancery Court determined that ECO was entitled to a refund of the contractor's taxes paid.
On appeal to the Mississippi Court of Appeals, the Commission argued (a) that all repairs to water and sewer systems are statutorily subject to the contractor's tax, (b) that treating repairs to personal property differently from repairs to real property does not make sense, and finally (c) that the property in question was real property and not personal property. The Court rejected each of these arguments. The Appeals Court held that (i) there is clearly an exemption from the contractor's tax for repairs to personal property; and (ii) a distinction could be easily made by the Commission between repairs to real and personal property, as the Commission makes such a distinction in repairs to residential and non-residential portions of sewage systems.
Finally, the Appeals Court found that the property which was repaired by ECO was indeed personal property. Citing Rule IV.10.01.502, the Court found that the repaired property was movable and not permanently attached to the sewage systems.
- Tax Study Commission Final Report
Earlier this year, Governor Barbour announced a Tax Study Commission (TSC) which would evaluate Mississippi's current state and local tax system and propose changes as necessary. The TSC released its final report in September. While the TSC found that Mississippi has an overall "diversified and balanced tax structure which ranks well in national studies," it nevertheless found "room for improvement in specific areas." Specifically, the TSC divided its recommendations into short-term and long-term.
- Short-Term Recommendations
- Shrink the tax gap: The State Tax Commission estimates that the Mississippi tax gap, the difference between taxes owed and taxes actually collected, may be as much as $120 million. The TSC concluded that the best way to shrink this gap is to upgrade the technology and hardware systems of the State Tax Commission.
- Restructure the State Tax Commission: The TSC concluded that independence should be added to the tax appeals process by dividing the office of the Commissioner of Revenue into two distinct offices: The Chairman of the State Tax Commission and the Executive Director of the Department of Revenue. The name of the State Tax Commission would be changed to the Department of Revenue, and the current three member appeals board would retain the State Tax Commission name. Taxpayers or the Department of Revenue could appeal adverse decisions of the State Tax Commission appeals board to the appropriate court. The TSC believed that a Mississippi business court should be created to handle these appeals.
- Corporate Income and Franchise Taxes:
The TSC recommended the following: Reduce the franchise tax rate to $2.25 per $1,000 of capital.
Eliminate the following rarely-utilized income tax credits: The Research and Development Skills Credit, the Child Care Credit, the Financial Institutions Jobs Tax Credit, and the Airport Cargo Charges Credit.
Exempt the first $10,000 of income earned by corporations, then switch to a 5% flat rate. Currently, Mississippi has a graduated rate which climbs from 3% to 5% as income increases.
Conform Mississippi state depreciation with federal depreciation.
- Personal Income Taxes: The TSC proposed:
Remove the option for married taxpayers to file jointly but report income separately.
Remove the option to claim a dependent when the dependent claims himself on a separate return.
Increase the standard deduction and personal exemption for Mississippi taxpayers.
Increase the exemption provided for dependents.
Expand the 3% and 4% tax brackets, so that the first $10,000 of income is taxed at 3%, the second $10,000 at 4%, and all remaining income is taxed at 5%.
- Property Taxes: The TSC recommended expanding the existing Freeport Warehouse inventory exemption to give local entities the option to exempt all raw materials, work in progress, and finished goods inventory from ad valorem taxation. The TSC also recommended limiting the exemption only to manufacturing, warehousing and distribution facilities.
- Sales Taxes: Sales tax recommendations by the TSC were as follows:
Provide that sales tax exemptions for bond financing will be made available only to a select group of industries.
Provide local governmental entities with the ability to levy local sales taxes for specific projects.
Divert one percent of state sales tax revenues to counties.
Remove the sales tax exemption for purchases made by non-profit hospitals.
- Tobacco Taxes: The TSC recommended increasing the excise tax on cigarettes from the current 18 cents a pack to 50 cents a pack.
- Incentive Programs: The rebate provided by the Advantage Jobs Program would be reduced under the TSC's recommendation, and would also be subject to the discretion of the Mississippi Development Authority. In addition, the TSC recommended a complete repeal of the Growth and Prosperity Program.
- Capital Gains: The TSC recommended a capital gains rate of 3% for all long-term capital gains.
- Entertainment District: An "entertainment district" category would be created under TSC's recommendation, and such district would provide accelerated depreciation for buildings constructed in the district. Creation of an entertainment district would encourage the growth of theaters, convention centers, hotels and other entertainment entities.
- Long-Term Recommendations
The TSC recommended that Mississippi participate in the Streamlined Sales Tax Project. The Streamlined Sales Tax Governing Board seeks participation by member states which agree to adopt simplified sales tax structures. If this Project is able to recruit enough participating states, its Board hopes to lobby Congress to pass legislation which will enable states to levy a sales tax on internet, catalog and telephone sales made to out-of-state customers.
The TSC proposed a broadening of the Mississippi sales tax base. According to the TSC, this will essentially involve (a) reducing the number of carve-out sales tax exemptions, and/or (b) increasing the breadth of services which are taxed. Concurrently, the TSC believes that the overall sales tax rate can be reduced.
The TSC opposed a state lottery, noting that this was a regressive form of taxation which inevitably taxed lower-income households at a higher rate than higher-income households.
Finally, the TSC proposed that Mississippi should adopt a "unitary" reporting method for taxation of corporations. The unitary method requires a family of corporations to report as one operating entity under certain circumstances, instead of reporting individually.