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Tax Clarity Act Changes

The District of Columbia's Tax Clarity Act of 2000 was approved by Congress on June 9, 2001. The following changes that took effect in 2001 may affect your tax obligations to the District of Columbia. Please review the areas below that are applicable to your filing status and adjust your tax obligations accordingly.

If you need further information or assistance, please contact the Customer Service Center at (202) 727-4TAX.

Administrative

New Authority Provided to Special Investigative Agents for Office of Tax and Revenue - Special investigative agents of the Office of Tax and Revenue are given new authority as follows:

  • Under very limited circumstances, special investigative agents are allowed to carry firearms.
  • Special investigative agents can make arrests for probable cause without warrants.
  • Special investigative agents can apply for search warrants.

Mayor's New Authority in Real Property Tax Administration - The Mayor may modify real property tax regulations and rules without Council review.

Businesses, Commercial Property Owners

Elimination of 1% Credit for Timely Filed Sales Tax Return
The 1% sales tax credit for timely filed sales tax returns is eliminated. The change is effective for sales months beginning April 1, 2001 (sales tax return due date is May 20). Taxpayers who filed sales tax returns for April, May or June and claim the credit will be billed for the amount of the credit claimed, but will not be charged penalty or interest.

Special Events Promoters Must Provide Vendor Lists to Office of Tax and Revenue
Effective for special events beginning April 1, 2001, and later, promoters of special events in the District of Columbia must provide lists of vendors to the Office of Tax and Revenue. These lists must be provided 30 days prior and 10 days after the end of the event. Promoters are also responsible for making vendors aware of their sales tax responsibilities to the District of Columbia. A special event is an event that includes 50 or more vendors.

Corporations can Elect to File Consolidated Franchise Tax Returns
Effective for tax years starting after December 31, 2000, corporations can elect to file consolidated franchise tax returns with the District of Columbia. This election is subject to the following conditions:

  1. The affiliated group has elected or is required to file a consolidated federal return.
  2. All members of the affiliated group must consent to the filing.
  3. The affiliated group will not include any corporation that does not have gross income derived from sources within the District of Columbia.
  4. All members of the affiliated group are jointly and severally liable for the return.
  5. The District of Columbia may require consolidated filing in certain situations.

Regulations are being reviewed to assist those electing to file consolidated returns.

Interest Rate for Tax Underpayment
Effective for tax periods beginning after December 31, 2000, the interest rate for underpayment of taxes is reduced to 13% simple interest. The current rate is 18%. For tax periods beginning after December 31, 2002, the rate is further reduced to 10% compounded daily.

Q.  Does this mean the interest rate on my 1999 delinquency will be reduced to 13%?
A.  No, only delinquencies for tax periods beginning after December 31, 2000, are subject to the 13% rate.

Automatic Interest on Late Franchise Tax Refunds
Effective for tax years beginning after December 31, 2000, franchise taxpayers will receive interest if refunds are held more than 180 days. The interest rate will be 6%. The automatic refund applies to timely filed returns.

Q.  From what date is the 180 days counted?
A.  The 180 days is counted from the filing date or return due date, whichever is later.

New Penalties for Negligence, Substantial and Gross Misstatements
New penalties for tax years beginning after December 31, 2000, as follows:

  • Taxpayer Negligence: Penalty equal to 20% of underpayment.
  • Substantial Valuation Misstatement: Valuation misstatement equal to property basis difference of 200% or more is subject to penalty of 20% of underpayment.
  • Gross Valuation Misstatement: Valuation misstatement equal to property basis difference of 400% or more is subject to penalty of 40% of underpayment.
  • Penalty Threshold: There is no accuracy-related penalty if underpayment is less than $5,000 ($10,000 for corporations).

The above penalties are in addition to applicable interest.

Definition of Real Property Owner Includes 30-year Lessees
The definition of a real property owner is changed to include 30-year lessees and life tenants. This means that 30-year lessees now have the following rights:

  • Receive assessment notices
  • Receive tax bills
  • Appeal assessments

Transfer Tax Now Based on Sales Price of Property
The deed transfer tax is now based on the sales price of property to make it consistent with the recordation tax. The exception is when the sales price of the property is less than 30% of the assessed value, in which case the transfer tax is based on the assessed value.

Deed Tax Applies to 30-year Lessees and Life Tenants
Deed taxes now apply to 30-year lessees and life tenants just as they apply to any other "owner".

Commercial Refinancing Interests Subject to Deed Recordation Tax with Credit for Taxes Previously Paid
Commercial refinancings are subject to deed recordation tax as they have been for some time. This provision allows credit for taxes previously paid for prior refinancings up to the amount of previous refinancing.

Individual Income Tax Return

Sales Tax on Snack Foods
Effective June 9, 2001, the "snack tax" has been repealed, which means that taxpayers no longer pay the 5.75% sales tax on foods such as candy bars, potato chips, peanuts and canned and bottled soft drinks. The new rule provides that food (excluding food or drink prepared for immediate consumption) sold at convenience and grocery stores is exempt from sales tax. Snack foods sold by restaurants, carryouts, vending machines and other non-grocery establishments remain taxable.

Q.  So, I can buy a single can of soda at the grocery store and it will not be taxable?
A.  That is correct.

Whole Number Accounting
Effective for individual income and franchise tax returns filed for tax years beginning after December 31, 2000, whole numbers must be used. For amounts with cents less than 50, the cents will be deleted. For amounts with cents of 50 or more the dollar amount will be rounded up to the next dollar.

Examples:   
$34,560.58 is rounded to $34,561
$34,560.45 is rounded to $34,560

Interest Rate for Tax Underpayment
Effective for tax periods beginning after December 31, 2000, the interest rate for underpayment of taxes is reduced to 13% simple interest. The previous rate was 18%. For tax periods beginning after December 31, 2002, the rate is further reduced to 10% compounded daily.

Q.  Does this mean the interest rate on my 1999 delinquency will be reduced to 13%?
A.  No, only delinquencies for tax periods beginning after December 31, 2000, are subject to the 13% rate.

Automatic Interest on Late Individual Income Tax Refunds
Effective for tax years beginning after December 31, 2000, individual income taxpayers will receive interest if refunds are held more than 90 days. The interest rate will be 6%. The automatic interest on refunds applies to timely filed returns.

Q.  Can I get interest on my refund if I file January 15 and do not get my refund until April 30?
A.  No, the refund provision applies on the 91st day after the due date of the individual income tax return or after the return filing date, whichever is later. If the return is filed on or before the due date of April 15, interest will be paid if the refund is not mailed by July 15.

DC Offset of Federal Refunds for DC Obligations
The District of Columbia now has increased statutory authority to offset federal refunds for obligations owed to the District of Columbia. The offset will be used for District tax obligations and obligations of past due child support payments, past due payments to the University of the District of Columbia and overpayments of unemployment compensation that have not been recovered. Taxpayers will receive notification that an offset is to occur and will have a period to appeal.

Real Property Taxpayers Must File for Refunds Within Three Years
Effective immediately, real property taxpayers will only receive real property tax refunds within three years of payment. This provision does not apply if there is a lawsuit pending or for taxpayers with an exemption application pending with the District of Columbia.

Spouse May Not Be Liable for Income Tax Penalties Due to Tax Fraud of Other Spouse
In situations where spouses file joint DC tax returns, a spouse unaware of fraudulent behavior of the other spouse is only liable for his or her liability, interest and penalty, not that of the fraudulent spouse.

Tax-exempt Organizations

Tax-Exempt Criteria More Closely Linked to Federal Requirements
The District of Columbia definition of an exempt organization is changed to conform to that used by the Internal Revenue Service. The new definition will include the following organizations not currently part of the District's definition:

  • Activities that foster national or international amateur sports competition
  • Professional football leagues not organized for profit
  • Domestic fraternal organizations
  • Organizations of former and current armed service members

Social clubs will not be included in the DC definition of tax-exempt organizations.
The criteria for tax exemption in the District will now reflect the following:

  • Educational organizations no longer are required to embrace a teacher-student relationship.
  • Exempt organizations no longer need to carry on a substantial portion of activities in the District to be eligible for DC tax exemption.

Q.  Does this mean that I will automatically be eligible for a District of Columbia tax exemption if I have a federal exemption?
A.  No. If you have not done so, it is still necessary to apply for a District of Columbia tax exemption.

Changes in Requirements for Unrelated Business Income of Tax-Exempt Organizations
The following changes have occurred in the filing of tax returns to report unrelated business income of tax-exempt organizations:

  • Unrelated business income must be reported on a corporate franchise tax return (D-20) to the District of Columbia.
  • The corporate returns are due the 15th day of the 5th month.
  • Unrelated business income is subject to allocation and/or apportionment.
  • Unrelated business income of employer trusts benefiting employees is subject to tax.
  • Personal property used to generate unrelated business income is subject to personal property tax.

Filing Date for Real Property Exemption Use Report Forms is Changed to April 1
The filing date for real property exemption use report forms has been changed to April 1 from March 1.