NH Senate weighs ‘Planet Fitness tax’ fix

‘Step-up’ of businesses comes under scrutiny at hearing

It’s generally agreed that it’s time for New Hampshire to get rid of its unique “step-up tax” – first brought to the public's attention last year when Planet Fitness introduced its initial public offering. The question is how to ensure the fix is fair and costs the state the smallest amount of revenue possible, while at the same time keeping the state’s business partnerships competitive.

“Everybody agrees this is a problem,” said Sen. Lou D’Alessandro, D-Manchester. “The question is, what way does it make the most sense to deal with it?”

D’Allesandro and the rest of the Senate Ways and Means Committee, was looking at one approach – Senate Bill 342 — in a hearing on Tuesday. The House is looking at another, House Bill 1385.

What is at stake is about $20 million in revenue per biennium on the front end, the Department of Revenue Administration estimates, though it could be a lot more or a lot less, depending on what you count and who you talk to.

“Businesses don’t have an exit interview when they leave the state,” testified Bill Ardinger, a tax attorney with the Rath, Young and Pignatelli law firm. “So you don’t know if they are leaving because of business taxes.”

At the end of the last legislative session, shortly before the partnership went public, Planet Fitness was not shy about giving the reasons for saying it might leave the state.

At the time, the Newington-based fitness franchisor, an limited liability partnership, demanded that the state change its law and exempt IPOs from the step-up. The Legislature responded by passing HB 550, which eliminated the law altogether, but Gov. Maggie Hassan vetoed the bill, arguing that it wasn’t thought out and it would blow a hole in the budget.

In the end, Planet Fitness issued its public stock offering anyway, and thus far has remained in New Hampshire.

Dilemma in a nutshell

Fast-forward to Tuesday. Since SB 342 was not supposed to be retroactive, it no longer has anything to do with the Planet Fitness IPO. That’s just fine with Ardinger, who says that this is a long-term problem that affects any partnership that wants to sell its interest in its company at a profit.

Here is the dilemma in a nutshell: The federal government, and most states, tax that profit as income or capital gains on the personal level. But New Hampshire doesn’t have a personal income tax or a capital gains tax. So it taxes partnerships at the business level through the business profits tax.

Thus, the partner doesn’t have to pay anything, but the partnership pays 8.5 percent on its step-up in value, or in tax terms, its basis. This, said Ardinger, sometimes causes him reluctantly advise his clients to leave the state because of the cost.

As an example, he brought in the written testimony of Kevin Isett, CEO and co-founder of Avitide, a high-tech firm based in Lebanon.

Isett set up the company as a corporation, not a partnership, he said, just to avoid the step-up situation. But if it could change its structure to an LLC, it would be able to attract more capital, meaning the tax structure it was forced to choose “stymies the growth of the overall business and obstruct the creation of skilled STEM and manufacturing jobs here in New Hampshire,” Isett wrote.

SB 342 would eliminate the tax on the step-up in basis on the front end, but it would be revenue-neutral, said Ardinger, because the company would not be able to take a depreciation on the back end when the company is sold.

But DRA Commissioner John Beardmore disagreed.

He noted that some firms could go out of business and be sold for very little. Or they could grow enough out of state so that that by the time it is sold, the New Hampshire tax would be proportionately small.

There is also the “time value of money,” he said, which means that companies (and the state) puts a premium on having their capital now rather than later.

How much then would be offset on the back end? Beardmore had no idea. “We couldn’t even find a way to spitball this,” he said.

Working committee

Sen. Dan Feltes, D-Concord, said he worried that some firms might grab the tax break on the front end and then move out of state so it could avoid the tax at the back end, just creating the very same corporate flight the bill was trying to avoid.

Ardinger, however, doubted that scenario, arguing that the BPT hit was much larger.

“The step-up tax smells to high heaven,” he said. “How can I move to New Hampshire with that?”

The House bill is similar, but it would give companies the option of paying the tax up front or at the end. This will make it easier for companies to plan, testified the New Hampshire Society of CPAs.

Some companies might prefer to take the BPT hit up front if they have some offsets that they can use as a net operating loss or a business enterprise tax deduction.

But Ardinger warned that might cost the state more money, since businesses will leave.

In the end, the Senate decided to set up a working committee with the DRA and House and Senate members to sort the whole thing out, with the intention of coming up with a bill by the end of the session.