CONCORD, N.H.—In New Hampshire, which prides itself as a good place to do business with no sales, income or capital gains tax, small business owners are reeling over a last-minute, confusing addition last year to the state budget -- an expansion of a tax that could affect their earnings, and possibly, their future.
They'd at least like to understand it, raising numerous questions in the last few months on what types of transactions involving their profits are subject to the tax, how much it will cost them in record-keeping, and what happens when they want to sell off their assets.
The change applies the state's 5 percent interest and dividends tax -- aimed at investors since 1923 -- to owners of limited liability companies, which are easier to set up than corporations and offer greater management flexibility. All business losses, profits and expenses flow through to its individual members.
"I'm still fairly confused," said Sean Kendrigan, 40, who's run New Hampshire Computer Specialists in New London since 2004 and has five employees in his LLC. "A profit for me is basically my paycheck. It's not something where I'm banking thousands of dollars and building up this huge nest egg of money in some type of corporate machine. It's what I pay my mortgage with, it's what I put my kids to school with and buy my groceries with."
He estimated the tax change would cost him an additional $5,000 and $7,000 beyond what he expects to pay in taxes. "That's more than I have in the bank right now," he said.
The tax change is a priority for discussion Wednesday at the fifth annual Small Business Day at the State House conference. The event, to be held at the Holiday Inn in Concord, will feature a panel to explain the change, its implications and whether it will help the state. The participants are Tom Boucher, who runs the T-Bones and Cactus Jack's restaurant chain in New Hampshire; tax attorney William Ardinger, analyst Charles Arlinghaus of the Josiah Bartlett Center for Public Policy; and Republican state Sen. Jeb Bradley, who filed a bill to repeal the tax.
The state says the tax, which would apply to earnings for all of 2009, is an issue of fairness, treating all businesses equally. State revenue officials say it won't affect many small business owners, who reinvest profits to grow their companies.
Budget writers said the tax change would raise $30 million over two years. It would tax profit distributions if owners and investors go over what the state considers "reasonable compensation," a murky term that lawmakers are working better to define in the law this session.
Revenue officials estimate that 15,000 to 20,000 LLC owners and members will file returns as a result of the change, in addition to the 80,000 people who file interest and dividend forms.
Kendrigan says the tax will affect him, in addition to the taxes he pays taxes on business profits, business enterprise, payroll and unemployment. "You hear the number '5 percent' -- it doesn't sound a like a lot, but it has a potential to make a big difference," he said.
The pending tax, which could go into effect as early as Feb. 19 once a legislative committee approves the rules, has many business owners taking a wait-and-see approach. But groups such as the New Hampshire chapters of the Business and Industry Association, the National Federation of Independent Business and the Small Business and Industry Association are overwhelmingly opposed to the tax change and have called for a repeal. In addition to saying that it was rushed through the Democratic-controlled Legislature without any hearing, they say the change amounts to an income tax on business owners.
"The general feeling is that this is half-baked and not quite ready for prime time," said Bruce Berke of the state chapter of the National Federation of Independent Business, which represents 1,500 businesses in New Hampshire.
This being an election year, Republicans have taken up the cause, calling it a "job-killing tax." Democrats say that's not the case.
"The recent LLC changes were designed to close a loop hole so that all businesses in New Hampshire are treated equally," Derek Richer of the state Democratic Party said. "A corner store shouldn't be treated differently under New Hampshire tax law than a group of lawyers just because the corner store is registered as a corporation and the lawyers are registered as an LLC."
Boucher, who owns several LLCs, said the tax isn't going to break his business, but "it does give me pause, and it does, I think a lot of entrepreneurs and investors pause to expand in New Hampshire. ... I do know that this puts us in a place that makes us less competitive." Boucher said he thinks the Legislature has taken a big risk in passing the tax; the change may turn away the future growth of business, he said.
The debate has legislators on both sides agreeing that the 1923 tax law itself is confusing and in need of an overhaul. Veteran Democratic state Sen. Lou D'Allesandro, who didn't approve of the last-minute tax and voted against the budget, is leading a bipartisan group to come up with clearer rules for taxing small businesses and their owners.
"We've got to get both parties together to get something done that makes sense," he said.
