Legislature considers “step up” tax

The New Hampshire House and Senate are considering two bills that change how the state taxes sales of an interest in some businesses.

The bills – HB 1385 and SB 342 – attempt to address a business tax issue highlighted last year by the Planet Fitness transaction. New Hampshire-based Planet Fitness said they were considering moving their headquarters out of state because of the tax.

Under current state law, if an owner of a business sells his or her interest in a “step up” transaction to someone else, the business – not the individuals – must pay a tax on the sale. However, the business does not get any money from the sale. Generally speaking, the only person to see an immediate profit is the owner selling his or her interest. In other states the sale would be taxed to the individual selling the interest as a capital gain. New Hampshire does not tax capital gains incurred by individuals.

HB 1385 and SB 342 remove the tax on the business when an owner sells his or her interest.

Due to the rules regarding tax deductions for depreciation, supporters argue that although the removal of the “step up” tax may impact state tax revenues in the immediate future, the proposed change will have zero impact on state revenues in the long-term. In addition, bill supporters argue that start-up businesses avoid New Hampshire because of this unique tax, and the tax change will encourage more start-ups, increasing business tax revenue overall.

Bill opponents argue that New Hampshire cannot afford the potential decrease in business tax revenue. According to the Department of Revenue Administration, this tax provides $1 to $13 million in revenue each year.

The House and Senate have both given preliminary approval to HB 1385 and SB 342. The two bodies are debating whether to eliminate the “step up” tax altogether, or if businesses should be allowed to choose to pay the “step up” tax if it better suits their financial situation.

How do you think New Hampshire should tax sales in business partnerships?  Let us know in the comments.