With a relatively low regulatory burden and a high quality of life, NH often outflanks its neighbors on national surveys of business friendly states. And while there is no income or sales tax, NH companies still face business taxes-taxes some small business owners don't fully understand.
New Hampshire collects two main business taxes: the Business Profits Tax, a tax on profits, and the Business Enterprise Tax, based primarily on payroll and paid mostly by small businesses. The taxes bring NH hundreds of millions of dollars a year and account for about 25 percent of all state revenue. As we enter tax season, here's a primer on what you're paying.
The Business Profits Tax
Enacted in April 1970, the Business Profits Tax (BPT), now set at 8.5 percent, is assessed on income from business activities in NH and from multi-state businesses. Organizations with $50,000 or less of gross receipts are exempt, according to the NH Department of Revenue Administration. Businesses are taxed if they have a defined connection with the state. That generally means a "taxable presence" due to owning or leasing NH property, performing services in the state, employing state residents or owning capital based in NH.
The Business Enterprise Tax
Enacted in July 1993, the Business Enterprise Tax (BET) is a 0.75 percent tax on the enterprise value tax base, or the companies' paid or accrued compensation, interest paid or accrued, and dividends paid by business enterprises (after special adjustments and apportionment). Businesses with more than $150,000 of gross receipts, or an enterprise value tax base of more than $75,000, pay it. Businesses first calculate their BET payment. If that is under the BPT threshold, they just pay the BET. If over, they credit the BET payment to the BPT, reducing the BPT.
How Tax Credits Can Help
Businesses can receive a tax credit for contributions to state research and development programs, to the Community Development Finance Authority (CDFA), or to a variety of other nonprofits. The CDFA program allows businesses that donate to specific projects benefiting NH to receive a tax credit totaling 75 percent of the donation's value. That means a $100,000 donation to a CDFA-approved project (listed at www.nhcdfa.org under tax credit programs) qualifies for a state tax credit of $75,000. Donors can also receive a federal tax credit of about 10 percent, or $10,000. So the actual cost of a $100,000 contribution is $15,000, or 15 percent of the total donation.
Why Two Taxes?
The BPT was designed as NH's version of corporate taxes other states enacted in the late 1960s and early '70s. In the '90s, Concord lawmakers agreed with NH's largest businesses that reform was needed, as less than 1 percent of businesses were paying more than 70 percent of the business taxes, says Bill Ardinger, an attorney with Rath, Young, and Pignatelli P.C. in Concord.
Their answer was the BET. Rather than focusing on profits, it was a value-added tax based on labor costs, interest and dividend incomes, Ardinger says. It was intended to touch all NH businesses, not just corporations. First set at 0.25 percent, it allowed lawmakers to drop the BPT from 8 to 7.5 percent, and, at one point, even to 7 percent. The taxes combined are a major revenue source for education aid.
"Other states have various income taxes. We're taxing at the enterprise level," says Steve Norton, executive director of the nonprofit NH Center for Public Policy Studies in Concord.
How Much Money Do They Raise?
The state collected $487.9 million from BET and BPT taxes in FY2009-down 21 percent from FY2008, according to unaudited state data. For the first five months of FY2010 (July to November), NH collected $136 million in business taxes, down 0.7 percent from the same period last year.
Are Changes on the Horizon?
Last spring lawmakers, seeking to balance the state budget, debated and defeated a proposal to suspend the BET tax credit for one or two years because the state needed to bring in more tax revenue. Current bills propose increasing the threshold for BET taxation and exempting new businesses from the BET for their first three years in NH.
Will the Dual-Tax System Remain?
Both taxes faced opposition at inception, and that hasn't changed. Some larger companies say the BPT is too high, and smaller businesses complain their size means they should be taxed less or not at all.
Norton, whose position requires he remain publicly neutral, observed that business tax systems like NH's historically tend to stick. "Taxes like the BET tend to be more efficient because they are imposed at low rates across a broad base, which means less people will try [to] avoid paying them," Norton says. "They also tend to be more stable over time because they are primarily based on base salaries and not on company profits."
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