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The specter of regulatory change is one of greatest causes of uncertainty among corporations today.
Companies know well that immigration reform, health-care reform, finance reform, global warming and business conducted with foreign countries are issues garnering attention at the federal level. Federal changes in trade-secret piracy protection are picking up steam too (See story in this issue of The Advisory). But many subjects on the minds of corporate executives are making progress in state houses across the country.
According to BMGI, an operational strategy consulting firm, “A changing regulatory environment is always of concern in certain industries, but uncertain energy, environmental and financial policy is complicating the decision making for nearly all companies today. ... Whether it is a demand from customers or shareholders to become more ‘green,’ the threat of increased costs due to new carbon taxes, constant talk of changes to corporate tax rates, or the impending health-care mandate for businesses … much is unsettled.”
Focusing on banking, a white paper produced by IBM says regulatory burdens will intensify for that industry. “Demands for transparency from the market and supervisory pressures from regulators will only increase in the foreseeable future. As industry globalization expands and further consolidation takes place, regulators are expected to continue seeking to provide a level playing field and prevent excesses. Greater transparency will be critical—not only as markets are given a greater role in the burden of supervision, but also because of the increased use of alternative suppliers.”
While Ernst & Young’s “Insurance Business Pulse” focuses, of course, on insurance, much that impacts insurers has a similar or consequential impact on all varieties of organizations. E&Y puts regulation at the top of its watch list, followed by macroeconomic trends, cyber-risk and data security (with its own evolving regulations), Eurozone debt crisis, talent recruiting, availability and cost of capital, corporate governance failures, reputational risk, and the impact of tax and accounting changes.
Accounting Today issued its Top Regulatory Changes for Businesses in 2014. They are: Affordable Care Act, Defense of Marriage Act (its impact on payroll taxes, health insurance and employment laws), immigration and e-verify, IRS priorities (particularly on the hospitality and restaurant industries), and efforts by policymakers to make changes to retirement plans, such as adding “lifetime income illustrations” to 401(k) plans. Accounting Today continued its list by noting how changes or focus on certain employment regulations will impact businesses. Specifically, it singled out issues such as “continued enforcement for the misclassification of employees as independent contractors” and minimum wage and overtime provisions. It notes strong support for increasing the minimum wage. Once again, privacy and data security regulations will be important to watch.
Here we attempt to offer an overview of 2014 activity and look to what companies might expect from states, legislatively speaking, in 2015.*
Forty-three states plus the District of Columbia and Congress have considered minimum wage bills this year, according to LexisNexis® State Net®, with 10 and the District of Columbia adopting measures to hike their wage incrementally over the next few years (the latest was Rhode Island, which was signed into law by Gov. Lincoln Chafee (D) on July 1, 2014). Most of the approved measures max out at around $10 per hour, though Massachusetts Gov. Deval Patrick (D) signed legislation on June 26 that would give the Bay State one of the highest minimums in the country at $11 per hour, beginning in 2017. The D.C. standard is even higher, $11.50, and goes into effect a year earlier. Both, however, pale in comparison to the city of Seattle, which adopted a $15-per-hour minimum, the highest in the nation.
Meanwhile, in San Diego, the City Council’s approved increase in its minimum wage will not go into effect in 2015 as planned. Instead, it will be decided by voters on the June 2016 ballot. Opponents of the increase reportedly secured enough signatures to force the vote, U-T San Diego reported.
Two years after the U.S. Supreme Court ruled that states couldn’t be compelled under the Affordable Care Act to expand their Medicaid programs to cover adults at 138 percent of the federal poverty line, most have already determined voluntarily whether they will do so. Only one, New Hampshire, made that decision legislatively this year. According to the National Conference of State Legislatures and the Kaiser Family Foundation, 26 states and D.C. have now opted in, 18 have definitely opted out, and five—Arkansas, Indiana, Iowa, Pennsylvania and Michigan—have proposed their own alternative plans that are still pending federal approval. In Virginia, lawmakers rejected an expansion proposal this session, but Gov. Terry McAuliffe (D), is said to be considering options to do so via an executive order. The Newport News, Virginia, Daily Press reported that Virginia received a federal grant of $9.3 million to help citizens enroll in the federal marketplace.
With states collectively facing trillions of dollars in unfunded pension liabilities, pension reform has been a white-hot issue in recent years. This year hasn’t been much different, with the State Net Hot Issues database showing legislative enactments pertaining to state pensions in 35 states, including the somewhat unexpected passage of California AB 1469, increasing the amount teachers have to contribute to their pensions.
In Detroit, that city’s public-sector retirees voted overwhelmingly to approve the bankruptcy deal cutting their pension benefits. The judge overseeing the Stockton, Calif., bankruptcy indicated he will sign off on the city’s proposed cuts to pension payments made to the California Public Employees Retirement System, or CalPERS. But the most substantive action on the issue has actually occurred outside the statehouses. The Illinois Supreme Court ruled that that state's constitution prohibited any “diminishment” of health-care benefits for public retirees. The decision, consistent with the widely held belief that benefits for current retirees cannot be touched, dealt a major blow to the historic pension overhaul enacted by the state last year, which had presumably given other states with pension holes smaller than Illinois’ $100-billion chasm hope of shoring up their own retirement systems.
Patent law has long been the sole purview of the federal government. But growing attention on the issue of so-called “patent trolls”—people or companies that file often-questionable legal claims against businesses they say are violating their patent rights—has motivated states to join the game as well, State Net reports. In 2013, Vermont became the first to ban such “bad faith” patent infringement lawsuits. The dam broke in 2014, with 12 states adopting similar bills by mid-year. Two more joined this summer. In Illinois, SB 3405 was signed by the governor on Aug. 26, with a Jan. 1, 2015, effective date. In New Hampshire, SB 303 was signed into law on July 11 and became effective immediately. Identical bills also failed in almost a dozen states.
State and local officials are struggling to get a handle on digital technology–driven businesses like Uber, Lyft, Airbnb, and Bitcoin that are disrupting the industries in which they operate, State Net reports. A week hasn’t gone by recently without a news headline reporting regulatory action on one of these types of businesses. In late May, for instance, the vacation rental provider Airbnb agreed to hand over its user records to New York Attorney General Eric Schneiderman in connection with an investigation into the company's operations in New York City. New Mexico's Public Regulation Commission ordered the ride-sharing service Lyft to stop conducting business in the state until regulators can determine whether the service is operating legally. Virginia's Department of Motor Vehicles issued a similar cease-and-desist order to both Lyft and competing service Uber. California Gov. Jerry Brown signed legislation (AB 2293) this year to regulate ride-sharing services like Uber and Lyft.
The governmental actions have now reached the legislative level. Colorado Gov. John Hickenlooper (D) signed SB 125, officially authorizing and regulating ride-sharing services in the state. California Gov. Brown signed AB 129, repealing a prohibition against the use of anything other than official U.S. currency for commerce in that state and opening the way for digital currencies like Bitcoins, which have been growing in popularity. With the amount of money at stake—nearly $888 billion was spent on business and leisure travel alone in 2013, according to the U.S. Travel Association— other states are likely to follow Colorado and California’s lead.
Internet Sales Tax
Last year, the U.S. Supreme Court refused to review a New York appeals court decision requiring online retailers like Amazon.com® to collect sales taxes in states where they have affiliates that promote their products. With states standing to lose $23 billion a year in uncollected taxes on online, phone and catalog purchases, according to an estimate by the National Conference of State Legislatures, State Net predicted the 37 states that didn't already have “affiliate nexus tax” laws—commonly referred to as “Amazon taxes”—might try to enact them this year. But only one state, Colorado, has enacted such a law (HB 1269), according to the LexisNexis® State Net Hot Issues database. Nine states tried, but failed to pass, Internet sales tax bills, while at least six states are weighing such measures.
Congress could resolve the issue by passing the Marketplace Fairness Act, which would allow each state to impose sales and use taxes on online retailers with at least $1 million in sales within their borders, regardless of whether or not the retailers have a physical presence there. Although a version of that measure was passed by the Democrat-controlled Senate, it is hung up in the Republican-led House, State Net reports.
Twenty-one states plus the District of Columbia and Congress considered hydraulic fracturing bills so far in 2014, State Net reports. The most notable were North Carolina’s SB 786, which authorized use of the controversial oil and natural gas extraction process, and California’s SB 1132, which unsuccessfully sought to impose a moratorium on fracking in the Golden State. But fracking supporters are facing a new challenge. Regulators in Oklahoma, Texas and Iowa are pondering imposing new rules on the disposal of fracking-created wastewater after those states noted an astounding increase in seismic activity in areas around fracking wastewater injection wells, which use extremely high pressure to inject wastewater thousands of feet into the ground. And on June 30, the New York Court of Appeals ruled that Empire State cities have the legal power to block fracking within their own borders.
The federal Highway Trust Fund was running on fumes this year and was set to hit empty before the end of August. Congress took remedial action and President Obama signed a $10.8 million measure earlier that month. But that fix is only a temporary one, State Net reports, so states are left to come up with their own funding sources to meet their mounting infrastructure needs. Pennsylvania did this last year by enacting HB 1060, gradually increasing the state’s gas taxes and motorist fees over five years to provide at least $2.3 billion annually for transportation projects. In August, voters in Missouri voted against taking similar action, rejecting a .75 percent increase in the state’s 4.225 percent sales tax.
New York Gov. Andrew Cuomo (D) signed legislation this year authorizing the limited use of medical marijuana for critically ill residents, making the Empire state the 23rd since 1996 to do so. But a growing trend within the trend has been allowing the use of low-THC cannabis oil, predominantly to treat seizures and similar illnesses in children. According to State Net, this year Minnesota, Alabama, Kentucky, Wisconsin, Iowa, Florida, Mississippi, Tennessee, Utah and South Carolina have adopted measures to allow the use of cannabis oil under specific conditions. North Carolina Gov. Pat McCrory (R) signed similar legislation into law on July 3.
Obviously, there is a great deal to watch as 2015 approaches. On a general note, any shifts in party control over state legislatures or Congress, or in gubernatorial and presidential posts, likely will have an enormous impact on regulations. Both sides have promised to introduce new sweeping changes or tear down old ones. You can get ongoing coverage of pending legislative issues with a complimentary subscription to the State Net Capital Journal.
* Editor’s note: Thanks to LexisNexis® State Net® for the bulk of the information in this article. It was prepared by State Net Editors Korey J. Clark and Richard Ehisen, with contributions from David Giusti of State Net. It was edited by Advisory Editor Tom Hagy with assistance from Kristin Casler, a freelance legal writer based in Philadelphia.