INSIGHT: Controlling Interest Transfer Taxes—16 Going on 17

A new year brings reflections and predictions, and the tax world is no exception. To be sure, on the federal level, taxpayers continue to expect Tax Cuts and Jobs Act (TCJA) guidance. On the state and local level, states are expected to increase sales tax enforcement due to South Dakota v. Wayfair Inc., and provide even more guidance on TCJA topics. Taxpayers conducting business overseas may be preparing to pay new taxes such as digital services taxes and comply with additional disclosure requirements. The list goes on, and while these are important considerations for 2020, taxpayers completing mergers or acquisitions also need to pay attention to increases in state and local real property transfer taxes.

Controlling Interest Transfer Taxes (CITT)

Transfer tax rules generally impose tax on the transfer of real estate based on the amount of consideration paid (a “real property transfer tax”). This means that tax is paid in a local jurisdiction when a deed is recorded. In addition, some jurisdictions impose tax on the transfer of an ownership interest in an entity holding real estate, notwithstanding the fact that a deed was not recorded. These taxes may be effective along with a real property transfer tax. They are referred to as “controlling interest transfer taxes (CITT).” Taxpayers completing stock acquisitions, or other mergers or reorganizations, should be particularly aware of exposure. Even if a merger qualifies as a tax-deferred reorganization under the federal tax code, state or local property taxes may be imposed if the stock transferred represents ownership in an entity holding real estate, and no exemption is available.

Before 2019, taxpayers were advised that there were 16 states that either impose or allow municipalities to impose such taxes: Connecticut, Maine, Washington, the District of Columbia, Maryland, Michigan, New Hampshire, Delaware, California, New Jersey, New York, Florida, Minnesota, Illinois, Pennsylvania, and Rhode Island. Because Vermont imposed a CITT that became effective in July 2019, there are now 17 states that impose a CITT.

CITT in Vermont

On June 18, 2019, the governor of Vermont enacted a CITT that became effective July 1, 2019. Vermont indicated in the fiscal notes for the law that it took cues from other states in designing its CITT in order to increase revenue. Similar to states like Maine, Connecticut, and Washington, Vermont uses the fair market value of the property as the tax base. Vermont also includes an “acting in concert” clause to aggregate transfers of interests, and exempts a handful of transactions, which taxpayers may find useful.

The Vermont CITT applies to “a transfer or acquisition of a controlling interest in any entity with title to Vermont property.” In Vermont, a controlling interest is defined as:

• For corporations—either 50% or more of the total combined voting power of all classes of stock of such corporation, or 50% or more of the capital, profits, or beneficial interest in such voting stock of such corporation; or
• For a partnership, limited liability company, association, trust, or other entity—50% or more of the capital, profits, or beneficial interest in such partnership, limited liability company, association, trust, or other entity.

The tax rate is 1.25% of the value of the property transferred, which is the fair market value of the property apportioned by the percentage of the ownership interest transferred.

‘Acting in Concert’

Like New Jersey, Vermont also includes an “acting in concert” rule. Under the statute, “all acquisitions of persons acting in concert are aggregated for purposes of determining whether a transfer or acquisition of a controlling interest has taken place.” The Vermont Department of Taxes is required to publish regulations that provide standards to make this determination. The following factors listed in the statute may cause interests to be aggregated:

• If the purchasers are under common ownership; or
• If the purchasers are not under common ownership, the purchasers act as a single person, indicated by the unity with which they negotiate and complete the transfer. (See Vermont Statutes Title 32, Section 9601(12)(C)(ii).)

However, the statute is specific with respect to transactions that are to be considered separate transactions in determining whether there was a transfer of a controlling interest. These transactions are defined as those in which purchasers are unrelated but acquire interests without regard to other purchasers. (Section 9601(12(C)(ii).)

Exemptions and Anti-Abuse Clauses

Vermont includes a handful of exemptions for transfers made with respect to non-recognition transactions under the federal tax code. For certain exemptions, the statute also includes anti-abuse language for which allows tax to be imposed if the department finds that “a major purpose” of the non-recognition transaction is to avoid the property transfer tax.

The following transfers are exempt from CITT but are subject to an anti-abuse rule:

• Transfers with respect to mergers or consolidations of corporations for which no gain or loss is recognized under the federal tax code, and bona fide transfers to shareholders of corporations in connection with the complete dissolution thereof;
• Transfers with respect to the formation of a corporation under federal tax code Section 351;
• Transfers with respect to the formation of a partnership under federal tax code Section 721;
• Transfers by a partnership to a partner in a complete dissolution of the partnership for which transfer no gain or loss is recognized under the federal tax code;
• Transfers with respect to the formation of a limited liability company for which no gain or loss is recognized under the federal tax code; and
• Transfers to a member with respect to the dissolution of a limited liability company for which no gain or loss is recognized under the federal tax code.

Vermont provides for an exemption, without an anti-abuse rule, for transfers made by a subsidiary corporation to its parent corporation if the only consideration is the cancellation or surrender of the subsidiary’s stock.

The Vermont statute requires that the “property transfer return” is required to be delivered to the Commissioner within 30 days after the transfer or acquisition. According to the department, the property transfer return tax (PTTR), VT Form PTT-172, should be filed online through the myVTax system because the online system applies the correct tax rate even if closing happened in prior years. The department also provides the Quick Reference Guide for Vermont Property Transfer Tax Return – Form PTT-172, which helps answer the numerous questions on the form about how the property was acquired and its uses before and after the transfer. Although Vermont’s form seems to require more effort than other states’ forms, the Quick Reference Guide is helpful and thorough.

Conclusion

In the fiscal notes, the Vermont legislators point out that, based on other state experiences, revenues from controlling interest transfers tend to increase year over year for the first two to three years. Other states and localities have also taken notice as they try to increase revenues. For example, the city of Boston has recently requested permission from Massachusetts to impose its own CITT in order to alleviate its housing crisis. In December 2019, the Ohio legislature proposed an amendment to impose a CITT. While often an overlooked topic during mergers and acquisitions, taxpayers should be aware of the increasing number of states and localities imposing the CITT in 2020.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Miriam Song is a tax specialist at Gannett Co. All views, thoughts, and opinions expressed in this article belong solely to the author, and not to any entity with which she is, has been, or will be associated.