District Of Columbia Creates Refundable Retailer Credit, Increases Sales Tax Rates and More
Recently, District of Columbia Mayor Muriel Bowser signed the “Fiscal Year 2019 Budget Support Congressional Review Emergency Act of 2018” (the Act). The emergency legislation closely resembles the provisions contained in the “Fiscal Year 2019 Budget Support Act of 2018”, which was sent to Congress for review. The Act’s more consequential provisions include: 1) an increase to the general sales tax rate; 2) a refundable credit for retailers; 3) clarification that the 20% business income deduction established under the Tax Cuts and Jobs Act will not be allowed for District residents; and 4) an increase to the tax rate for private ride-hailing services.
Franchise Tax Refundable Credit
For tax years beginning in January 1, 2018, certain retailers can claim a refundable tax credit against the corporate franchise tax and unincorporated business franchise tax. The refundable credit is equal to: 1) 10% of the total rent paid by a business entity for the rental of a retail location during the tax year, up to $5,000; or 2) the total Class 2 real property taxes paid by a business entity that owns its retail location, up to $5,000. A qualified retailer means a business entity that makes sales at retail and files a sales tax return for such sales, has less than $2.5 million in federal gross receipts or sales, and is current on all District of Columbia tax filings and payments. Retailers operating a business on property that is already exempt from, or receiving other tax credits against will not be eligible for the new refundable franchise tax credit.
Sales and Use Tax
The Act increased the general sales and use tax rate to 6% from 5.75%. Other significant sales and use tax rate increases include:
- The rate for transient accommodations increased to 10.20% from 10.05%.
- The rate for the sale of alcoholic beverages increased to 10.25% from 10%.
- The vehicle rental rate increased to 9.25% from 9.0%.
IRC §199A Business Income Deduction
The Tax Cuts and Jobs Act created a new deduction of qualified business income for certain taxpayers under IRC §199A. The deduction is 20% of a taxpayer’s qualified business income (QBI) from a pass-through entity. The Act clarified that the District of Columbia will not be conforming to this federal tax provision. As such, the deduction is not available to District residents.
Private Ride Hail Tax
The tax rate on companies providing ride-hailing services has increased to 6% from 1%.
Businesses should review the various tax increases that went into effect in the District of Columbia on October 1, 2018 to determine the impact on their business operations.
Contractors that issued fixed fee or lumpsum contracts where their purchases for supplies were not completed before October 1, will be charged the new rate. Contractors should review their contracts to see if they can pass the increase on to their customers.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
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