More than 200 attend hearing on NH business tax

AP News
Posted: Dec 16, 2009 5:43 PM

Some New Hampshire small business owners who are subject to a new tax complained at a state hearing Wednesday that they never had the chance to address it and fear it will threaten their livelihood and future job growth.

"Any way I look at this I see a cost," said Carolyn Virtue of Sanbornton, who started a small medical case management business for seniors with her sister 10 years ago.

The Department of Revenue Administration held the hearing to gather comment on rules it is developing to extend the state's corporate 5 percent interest and dividends tax to income derived from some limited liability companies and partnerships, which previously had been exempt. The tax change is expected to produce $30 million over two years.

Virtue, who has worked 50-hour weeks and held other jobs on the weekends, said the income from her limited liability company was about $10,000. She said she doesn't have the resources to form a corporation.

"Unfortunately, 10 years of hard work has not gotten me there yet," said Virtue, who runs Heritage Case Management in Concord. So you are comparing and trying to create fairness with apples and oranges. I just ask you think of the LLC as an orange tree, and if we wanted to be fair to it and move it to the beautiful state of New Hampshire because the apples get to grow there, it would die. "

More than 200 people attended the hearing, not just to comment on the rules but also to express their frustration that the Legislature passed the tax at the last minute in June, without their knowledge. This was the first public form in which the tax, which takes effect next year, was addressed.

Limited liability companies have the characteristics of corporations, but all business losses, profits and expenses flow through to the individual members.

Gov. John Lynch says the change makes the tax code fairer and department officials said the aim is to treat taxpayers similarly without regard to the form in which business is conducted. But many businesses fear the tax will treat them unfairly and say it should be postponed. They want more time to discuss the tax.

Two Republican lawmakers, Rep. David Hess, and state Sen. Jeb Bradley, say they will lead an effort to repeal the tax when the Legislature convenes in January.

Revenue Commissioner Kevin Clougherty said he plans to hold several more hearings on the rules in January, in northern New Hampshire.

The department provided hypothetical situations to describe the change, including a case where two residents invested in the software industry, one in a limited liability company and the other in a corporation. Both businesses have the same number of investors, and each investor has the same ownership interest. Both businesses earn the same amount of taxable profit and pay the same tax.

Currently, if the profit is distributed to the investors of each business, the investor in the limited liability corporation wouldn't be taxed _ but the investor in the corporation would. Under the tax change, distributions from the limited liability company would be treated similarly to dividends paid to investors from corporations.

Concerns Wednesday included the additional costs to businesses for extensive record keeping; whether the state Constitution is being violated for making the tax retroactive to Jan. 1 without a hearing on it; whether there would be dramatic differences in taxing partnerships and limited liability companies; and whether the tax amounts to the introduction of an income tax, which New Hampshire doesn't have.

Even people familiar with business tax law said they found some of the rules confusing and suggested refinements.

"This is kind of a new and complex task," said Jim Usseglio, who represented the New Hampshire Society of CPAs.

"The lack of input from the business community _ particularly small business owners most impacted by the law _ tax practitioners and the general public is, in large measure, the reason why there continues to be so much confusion, angst, misinformation and misunderstanding over this matter," said Jim Roche, president of the New Hampshire chapter of the Business and Industry Association, which favors a repeal of the tax.