On July 14th, the District of Columbia Council voted 12 to 1 to override Mayor Vincent Gray’s veto of the District’s Fiscal Year 2015 Budget Support Act of 2014 (B20-0749). The legislation includes tax rate decreases for both individuals and businesses, as well as the heavily publicized “yoga tax” (i.e., sales tax on health club memberships). Many of the tax reform items were last minute changes to the budget, most of which were recommended to the Council last December by the D.C. Tax Revision Commission. The tax reform items are aimed at making the District’s tax system more competitive with its neighbors.
Some of the noteworthy tax changes in the budget, most of which begin to take effect in 2015, include the following:
- Individual Income Tax
- A 7% middle-income tax bracket for those earning between $40,000 and $60,000 for 2015. The rate would be further reduced to 6.5% in 2016. These individuals currently pay tax at an 8.5% rate.
- A lower 8.75% tax rate for income between $350,000 and $1 million. These individuals are currently subject to the 8.95% tax rate. The 8.95% rate will remain intact for income over $1 million.
- Increase to the standard deduction to match the federal level by 2017.
- Personal exemptions will be increased starting in 2017 and will match the federal exemptions by 2019.
- Business Taxes
- Reduction to the corporate and unincorporated business franchise tax rates from 9.975% 5o 8.25%. The reduction will be phased in over five years beginning in 2015.
- Replacing the current three-factor (i.e., property, payroll, and sales) apportionment formula with a single-sales factor formula.
- For sales factor purposes, receipts from services will be sourced to the District if the service is delivered to a location in District (aka Market Sourcing). The former rule sourced service receipts based on the location from which the services were performed.
- Sales Tax
- Expansion of the District’s sales and use tax to additional services, including the rental of storage space for household goods, carpet and upholstery cleaning, water for home consumption, health clubs, car washing, barber and beautician services, and bowling alley and billiard parlors.
The reduction in the business tax rate will put the District’s rate on par with Maryland’s corporate income tax rate, but will still be considerably higher than the 6% rate imposed on corporations in Virginia. The change to a single-sales factor along with the move to market sourcing could attract more multi-state service providers to the District, as the franchise tax will no longer be partially based on the location of a company’s property and payroll. The expansion of the sales tax base increases the list of services that are already subject to the District’s sales and use tax. Although the taxation of health club memberships received some bad press, mainly due to active special interests, the Federal City Council, D.C. Chamber of Commerce, and D.C. Fiscal Policy Institute all supported the package.
If you have any questions about D.C. taxes please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6200.
About the Author: Michael L. Colavito, Jr. is a senior manager in Aronson LLC’s Tax Services Group, where he provides multi-state taxation services pertaining to income, franchise, sales and use, and property taxes. Michael’s experience also includes representing clients at all stages of tax controversy, from audit through appellate litigation, and advising them on restructurings, state tax refund and planning opportunities.