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NH BET: Another State Income Tax?

Well, I've said it: Income tax. New Hampshire may not have a broad based income tax but certainly variations on a theme. The income tax has been the Granite State's political poison pill and yet New Hampshire's home-grown versions of taxation look, act and smell like income taxes.

Let's start our odyssey through the state's current taxes. I'll then introduce you to the BET and judge for yourself if New Hampshire has an income tax.

For those who do not own a business or have substantial interest/dividends you're not likely aware of New Hampshire's dark side. New Hampshire not only has two existing income taxes, but has added a third on July 1, 1993.

Interest and Dividends (I&D)

The state will tag an individual for 5 percent of taxable interest and dividends. The tax is straightforward with little opportunity for planning.

Business Profits Tax (BPT)

If you operate a business and have profits, the state wants 8.5% of the profit. Common and still good tax strategy is to eliminate profits by paying profits as compensation to owners. For the small business that pays out its profits avoiding tax, there is no guarantee NH Department of Revenue Administration will agree the compensation is reasonable. Reasonable compensation is like beauty... in the eye of the beholder.

This strategy has been so successful the BPT hits primarily publicly held companies that cannot pay out their profits. Notably, several years ago, Cabletron Systems of Rochester sued the state suggesting the existing BPT was unconstitutional. Cabletron lost the court battle but may have won the war. During negotiations, the company announced a major expansion in Rhode Island. Subsequently, the company settled with New Hampshire for $11 million. We'll probably never know the full amount of the tax due the state. Jobs can be powerful leverage.

What about a BPT Audit?

With the state's quest for tax revenue and the need for statewide educational funding, we can expect DRA to continue attacking compensation deductions. The state spends its resources at the audit and appeal level. It's no secret DRA knows the audit and appeal process is expensive and taxpayers are reluctant to appeal. Do not despair. You have appeal rights, but must prove compensation is fair based on the facts.

Business Enterprise Tax (BET)

Governor Merrill felt the heat from Cabletron but instead of fixing the existing system, the Governor and Legislature added another separate tax - the Business Enterprise Tax.

The BET is calculated separately from the Business Profits Tax. Most businesses that plan their way out of the BPT will get caught by the BET.

The BET tax base is:

Compensation paid, plus

Interest paid, plus

Dividends paid

Add these items and multiply by ¾ of 1 percent (.0075). Effective for tax periods ending on or after 7/1/2001 the rate increases from 0.5% (.0050) to 0.75% (.0075).

If your gross receipts exceed $150,000, or the tax base above exceeds $75,000, you must file a BET tax return.

Let's assume you pay $500,000 compensation (salary), and $200,000 interest. Your taxable base is $700,000 with a tax at ¾ percent or $5,250. Rule of thumb is $750 tax per $100,000 of BET tax base.

The BET is a credit against the BPT. The tax credit can be carried forward for 5 years.

BET - Income Tax by Another Name?

This tax looks and smells like an income tax ... except the employer is paying the tax, not the employee.

Historical Perspective

Imagine Governor Merrill campaigning on a platform where citizens pay an income tax of ¾ of 1 percent of salaries? Political suicide. The key to passing an income tax in New Hampshire is to call the income tax a Business Enterprise Tax ... ahem.

From: The Conway Daily Sun, Wednesday, October 20, 1993 - Page 5 [Updated to 12/28/2005]

© Robert L. Johnson, a CPA/PFS (Personal Financial Specialist), has been advising clients since 1970. His tax business and personal financial consulting firm is located in North Conway, NH and Wells ME. Articles on this site are general information and not tax advice. Please see your professional tax advisor.