by Guy Page
Act 9, a new state law, would collect state income taxes from Paycheck Protection Program loan funding provided to Vermont businesses in 2021. This unexpected taxation of an emergency benefit has the Vermont business community in an uproar.
Legislators have promised they’ll fix the problem. But the scheduled adjournment is about a month away, and they haven’t removed the tax collection provision yet.
Gov. Scott allowed H315, a broad spending bill, to become Act 9 because of some much-needed recovery provisions. However, he refused to sign it because of the onerous, unexpected state income tax on this year’s PPP. “The Legislature should reverse its decision to insert, at the last minute, a new and punitive tax liability on federal PPP loans,” Scott said in letter explaining why he wouldn’t sign. “These forgivable loans were issued to help employers survive this pandemic and preserve jobs. And our businesses have applied for these loans with the understanding they would not be taxed. In addition, Senator Leahy’s office has confirmed that these resources were never intended to be taxed. The Legislature should be at their side, helping them up. Not on their back, trying to raise yet more in taxes.”
PPP loans are in practice grants to help businesses survive during the pandemic-related economic downturn. The loans are “forgiven” provided the funds are disbursed as required. 2020 PPP loans were not subject to state taxation. But under the language of catch-all tax & revenue bill H315 passed by the House, PPPs to Vermont businesses are subject to tax.
Vermont businesses have received $1.2 billion in PPP loans, the Vermont State Auditor’s office said. About half of that funding has gone to Chittenden and Washington county businesses.
According to a report by the Lake Champlain Commerce, “since the start of this year, 8,146 new PPP loans totaling over $534 million have been made to Vermont businesses many under the understanding that they would not be taxed on those loans.”
Businesses not only face a significant tax hit for the 2021 PPP; male, white business owners, and sole proprietors, also were given lower priority. “Businesses that received loans in 2021 could be among the most vulnerable businesses as the program then started to require a 25% revenue loss and the Biden Administration prioritized women and minority-owned businesses, as well as sole proprietors, to the exclusion of other businesses for a two-week period,” the Chamber report said.
Not surprisingly, the Chamber and other business groups and individual businesses were crying foul during a recent discussion of the new law, based on H315, on April 20 in the Senate Finance Committee. And some legislators are responding defensively. They’re wondering why a bill passed by the Legislature is being revisited. They also say the reference to taxation was “placeholder language” and that they intend to revisit the issue.
“Witnesses tried to make clear to the Committee that there is not a desire to relitigate how or why the language to tax PPP loans was included in H.315 with the Governor allowing the legislation to become law without his signature, in part because of the issue of PPP taxation, it is now the law of the land and need to be reversed,” the Chamber report stated.
Some House lawmakers raised business leaders’ concern with less-than-encouraging declarations about solving the problem.
“On this idea of fairness and confusion with constituents … things change from year-to-year … we don’t always have the same tax law from year-to-year because things change … mostly I just mean that everything is unfair, usually, in the world, and that’s the environment we create law in, and that’s hard,” one legislator on the House Ways & Means Committee reportedly said. Another lawmaker said businesses who only got loans in 2021 “still have time to plan on paying taxes on that revenue.”
In response to these statements, business advocates like the Chamber want the see the Legislature follow through on its promises to fix the problem. “Our only focus is ensuring that legislation passes making forgiven PPP loans non-taxable before the scheduled May 22nd adjournment,” the Chamber report said.
On Tuesday, the Senate Committee on Finance heard testimony on the issue of PPP taxability. Senators expressed frustration that the business community was upset or uneasy with the language in H.315, as they felt that the language was just a “placeholder language” and that they always intended to revisit the issue and eventually take testimony at a later date. Still, another Senator expressed frustration that the Committee was taking time to hear testimony (for the first time) on the subject.
While Senators are indicating that their intent will likely move in a favorable direction, additional outreach to House members is needed by struggling businesses. Despite most of the concern stemming from the House Ways and Means Committee, the Committee has said that they are waiting on the Senate to lead on this issue and not taking testimony on it at this time, however, they did have an in-depth discussion on the issue this week in the broader context of linking up to the federal tax code.
The Committee’s conversation, which can be watched here, indicated that many members are still interested in taxing forgiven PPP loans with one legislator expressing, “on this idea of fairness and confusion with constituents … things change from year-to-year … we don’t always have the same tax law from year-to-year because things change … mostly I just mean that everything is unfair, usually, in the world, and that’s the environment we create law in, and that’s hard.” and another member saying that businesses who only got loans in 2021 “still have time to plan on paying taxes on that revenue.” In LCC’s opinion, both for fairness and a lack of confusion, the legislature should not treat two people differently because one had forgiveness before December 31st, 2020 and the other had forgiveness after that date. We believe they need to not tax PPP loans in 2021 just as they did in the tax year 2020.
Additionally, since the start of this year, 8,146 new PPP loans totaling over $534 million have been made to Vermont businesses many under the understanding that they would not be taxed on those loans. It would violate the rules of the program if they were to withhold funds from the loan to pay the tax liability created under H.315. Businesses that received loans in 2021 could be among the most vulnerable businesses as the program then started to require a 25% revenue loss and the Biden Administration prioritized women and minority-owned businesses, as well as sole proprietors, to the exclusion of other businesses for a two-week period.
The Committee is still also struggling with the antiquated “double-dip” or “double benefit” notion created by the Trump Administration’s Treasury Secretary and rectified on the national level by bipartisan leadership in Congress. If you continue to hear this from your legislators, remind them that there is only one benefit and that is the PPP loan itself; deduction of payroll and expenses is a normal part of the tax code and exists for good reasons. A person receiving a loan or grant should not suddenly mean that the tax code changes for them specifically overnight. Congress wrote the law that created PPP explicitly saying that they wanted the forgiven loan to be a tax-free grant as well as their payroll and expenses to have the same deductibility as they typically would under law. As we highlighted in our testimony to the Senate, the debate over the double benefit was strictly one