Welcome to the April 2024 issue of Weaver’s State and Local Tax Digest. This month’s digest features a proposed change to Tennessee’s Franchise Tax and related refund opportunities, income and franchise tax, sales and use tax, property taxes, and motor fuels tax updates.
INCOME AND FRANCHISE TAX UPDATES
California Allows 100% Foreign Dividend Income in Sales Factor for Water’s Edge Returns
The California Office of Tax Appeals (OTA) allowed inclusion of 100 percent of foreign dividend income from affiliates in the California sales factor denominator on a water’s-edge combined return. The OTA recently denied the California Franchise Tax Board’s (FTB) request for rehearing in the Appeal of Microsoft Corporation and Subsidiaries (OTA Case # 21037336), making the earlier decision final. On April 2, the OTA published its non-precedential opinion on the case. While the opinion is not precedential, water’s-edge filers with foreign dividends that did not include 100 percent of foreign dividend income from affiliates in the California sales factor denominator on a combined return should reassess their apportionment calculations and consider filing refund claims.
Class Action Certified in Case Challenging California Taxing Out-of-State Investors
A California Superior Court certified a taxpayer class action in Bahl Media, LLC v. FTB, San Francisco Sup. Ct., Case No. CGC-17-554150, a case challenging the Franchise Tax Board’s (FTB) $800 minimum franchise tax on out-of-state investors with passive ownership interests.
New Mexico Cuts Personal Taxes, Creates Energy Tax Credits, and Enacts Corporate Income Changes
New Mexico enacted H.B. 252, a tax reform law that reduces income tax rates, provides new child tax credits, and creates several clean energy tax credits. The new law adds an additional tax bracket to New Mexico’s tax system reducing personal income taxes across income levels. It also creates new energy tax credits for electric vehicles and chargers, new tax credits for advanced energy manufacturing, and other clean energy incentives. Finally, the bill modifies the state’s position on water’s edge groups and removes the subtraction of Subpart F income.
Proposed Tennessee Franchise Tax Changes Could Bring Refund Opportunities
Legislation pending in the Tennessee legislature could provide businesses with a refund for a portion of franchise taxes paid during the past three years. H.B. 1893/S.B. 2103, if enacted, would change the determination of Tennessee’s franchise tax by eliminating property as the minimum tax base and instead require the tax to be calculated using the taxpayer’s apportioned net worth. The bill was passed by the Tennessee House Finance, Ways, and Means Committee and is under consideration in the Rules Committee.
South Carolina to Request Additional Information on Intercompany Transactions
The South Carolina Department of Revenue can now require additional information to determine whether a taxpayer’s intercompany transactions have economic substance and are at fair market value. S.B. 298 allows the Department to request this information when it has reason to believe a taxpayer did not fairly represent the extent of its business activity in the state through using transactions that lack economic substance or are not at fair market value between members of an affiliated group. The taxpayer must provide the information requested within 90 days of the date of the notice. If the taxpayer did not fairly represent its business activity, the Department is able to redetermine the state net income of the taxpayer properly attributable to its business activity in the state and may require the taxpayer to submit a combined return.
SALES AND USE TAX UPDATES
Alabama Allows Contractor Tax Exemptions for “Statutorily Exempt Entities”
Alabama enacted S.B. 292 allowing the Department of Revenue to grant exemptions from sales and use taxes for the purchase of building and construction materials to be used in the construction of a building or other project for entities that are statutorily exempt from paying sales and use taxes. The law also provides for accounting for purchases and enforcement for violations. The Alabama Department of Revenue amended Rule 810-6-3-.77 in response to the change. Licensed contractors and subcontractors must apply per project for a certificate of exemption through their My Alabama Taxes account.
Arizona Qualified Healthcare Organizations Don’t Need TPT Exemption Certificates
Qualified healthcare organizations in Arizona are no longer required to obtain an annual transaction privilege tax (TPT) exemption certificate after they obtain an exemption letter with an exemption period that starts from January 1, 2024. Those letters will remain valid until the organization no longer qualifies. This change is from a 2023 amendment to Ariz. Rev. Stat. Ann. §42-5009(S). If the organization no longer qualifies for the exemption letter, it is their responsibility to notify the Department and any vendors they have supplied it to that they no longer qualify for the exemption and discontinue using the exemption letter. A Qualified Healthcare Organization that does not qualify for the exemption letter but continues to use it is liable for any tax, penalty, and interest that the vendor would have been required to pay if the healthcare organization had not given the vendor the exemption letter. The healthcare organization is liable from the date that it no longer qualifies.
Illinois Tax on Remote Sellers Challenged as Unconstitutional
An online pet medication seller appealed an assessment of more than $1.3 million in Illinois retailers’ occupation tax (ROT), use tax, and interest for remote sales made to Illinois customers. PetMeds argued that the assessment discriminates against interstate commerce in violation of the Commerce Clause and creates an undue burden on out-of-state retailers in violation of South Dakota v. Wayfair, Inc.
Mississippi Exempts Construction of Data Processing Facilities
On January 30, 2024, Mississippi Governor Tate Reeves signed legislation expanding the Major Economic Impact Act to include data processing facilities. The bill exempts from sales tax, for a period ending no later than one year following the completion of the construction of the facility or facilities comprising the project, sales or leases of: (1) component building materials, machinery and equipment used in the construction of a data processing facility or buildings comprising all or part of a project; (2) all equipment and other personal property needed to establish and operate the project and any expansions or additions. It also exempts sales or leases of electricity, current, power, steam, coal, natural gas, liquefied petroleum gas or other fuel used directly by the enterprise in the operation of the project.
Missouri Affirms $100,000 Economic Nexus
Missouri’s Department of Revenue issued a private letter ruling clarifying when out-of-state dealers and wholesalers selling goods into the state are required to register for sales and use tax. The Department affirmed that a seller is not required to register and collect Missouri use tax as a vendor unless they sell more than $100,000 of tangible personal property into the state in the previous calendar year or current calendar year. Sellers with more than $100,000 in sales into the state would have substantial nexus in the state and be required to register and collect use tax.
Nebraska Updates Guide on Installation Labor
The Nebraska Department of Revenue updated its sales and use tax information guide on installation labor. The update addressed specific information regarding the definition of terms, taxable installation labor, nontaxable installation labor, and general information on permits and collecting and remitting the tax.
New Mexico Finds Taxpayer Had Insufficient Evidence to Support Deduction Calculation Method
On remand from the Court of Appeals, New Mexico’s Administrative Hearing Officer (AHO) found that, although there were other methods for calculating the rental deduction at issue in determining the gross receipts tax, the method used by the Taxation and Revenue Department was reasonable under the circumstances. In Gemini Las Colinas LLC v. New Mexico Taxation and Revenue Department, the taxpayer was unable to provide sufficient evidence that the method used by the taxpayer to determine the deductible receipts was more reliable or accurate than the one used by the Taxation and Revenue Department.
New Mexico Issues Guidance on Taxation of Nonprofits
The New Mexico Taxation and Revenue Department (TRD) issued guidance on the registration and taxation of nonprofit organizations. Such guidance includes information on federal and state agencies with which a non-profit organization may have to register and information on the New Mexico corporate income tax, gross receipts tax, and compensating tax.
Oklahoma Eliminates 4.5 Percent Sales Tax on Groceries
On February 27, 2024, Oklahoma Governor Kevin Stitt signed into law H.B. 1955, which eliminates the state’s 4.5 percent sales tax on the retail sale of groceries. The law does not affect any local sales or excises taxes but prohibits enacting new local sales or excise taxes before June 30, 2025.
South Dakota Supreme Court Upholds One-Day Use Tax
The South Dakota Supreme Court upheld the state’s imposition of a use tax on equipment that was purchased out of state without paying out-of-state sales tax and was used in South Dakota for one day. The court held that imposition of the tax satisfied all four prongs of the Complete Auto test and did not violate the Interstate Commerce Clause or the Due Process Clause of the Fourteenth Amendment of the U.S. Constitution.
South Dakota Clarifies “Sellers” to Include Electronically Transferred Products
South Dakota Governor Kristi Noem signed into law H.B. 1019, which clarifies certain sales and use taxation statutory language. The law updates the term “seller” to mean “any person making sales, leases, or rentals of tangible personal property, any product transferred electronically, or services.”
Equipment not Permanently Attached to Vehicle Subject to Texas Vehicle Tax
A company that transported chemicals using ISO tanks attached to a semi-trailer chassis was audited for sales and use tax compliance and assessed tax, a partial 10% late penalty, and interest. It requested redetermination, contending the audit erroneously assessed sales and use tax on lease payments for tanks that are subject to motor vehicle tax as accessories to semi-trailers. The Texas Comptroller of Public Accounts found that the ISO tanks at issue in this case are accessories to a motor vehicle and are subject to the motor vehicle tax laws. Although they were not permanently attached to the semi-trailer, the ISO tanks were leased, not as stand-alone tanks, but as accessories to motor vehicles, making the ISO tank leases at issue subject to the motor vehicle tax. The tanks were exempt from sales and use tax.
Washington Provides Information on Taxation of Online Classes
The Washington Department of Revenue issued apublicationon the sales, use, and business and occupation tax consequences of certain online instructional classes. The publication provides that live online classes that allow for real-time participation and interaction between the presenter and the participants are not subject to retail sales tax. The gross income generated from this type of business activity is subject to business and occupation tax under the “service and other activities” classification. The interaction between the presenter and the participants must be a part of the live class and not just a separate ability to ask questions. Classes, including prerecorded videos, with interaction through a chat room or a digital help desk do not provide real-time participation.
PROPERTY TAX UPDATES
California Issues Aircraft Valuation Table for FY 2024-2025
The California State Board of Equalization (SBE) issued the California Standard Flight Times Table for the valuation of certificated aircraft for the 2024-2025 fiscal year. The table provides the intrastate and interstate standard flight times to be used for the 2024-25 fiscal year. The flight times table is to be used as the basis for time in the air component of the allocation formula, which consists of flight time and taxi time within California borders.
Illinois Announces 2023 Cook County Tentative Multiplier
The Illinois Department of Revenue announced a tentative 2023 property tax equalization factor of 2.8414 for Cook County. The Department is required by law to calculate the factor, often called the multiplier, to achieve uniform property assessment throughout the state. The Department determines the equalization factor for each county by comparing over three years the actual selling price of individual properties to the assessed value placed on those properties by the county assessor. If the median level of assessment for all property in the county varies from the 33 1/3 percent level required by law, an equalization factor is assigned to bring assessments to the legally mandated level.
Louisiana Governor Provides Criteria for ITEP Program
Louisiana Governor Jeff Landry issued Executive Order No. JML 24-23, stating the criteria for consideration in the state’s Industrial Tax Exemption Program (ITEP). Louisiana’s ITEP program offers an 80 percent property tax abatement on a manufacturer’s new investment and capitalized additions. An initial five-year abatement can be renewed for another five-year term. The executive order does not apply to projects approved before February 21, 2024.
Texas Adopts New Definition of Petroleum Products
The Comptroller of Public Accounts adopted 34 Tex. Admin. Code § 9.4038, concerning the definition of petroleum products. The new section replaces existing §9.4201, which the comptroller is repealing to improve the clarity and organization of Subchapter I. The section is also updated to better reflect the list of products that fall under this definition. The definitions are expanded to incorporate the products of ethane, normal butane, isobutane, and natural gasoline, among other updates.
FUELS AND EXCISE TAX UPDATES
Indiana April Gasoline Use Tax Rate
Indiana posted its gasoline use tax rate of $0.189 per gallon for April 1, 2024 – April 30, 2024.
Appeals Court Upholds that Butane and Gasoline Mix are Not Alternative Fuel Mixtures
A federal Appeals Court upheld a Claims Court decision that the taxpayer is not entitled to tax refunds for excise taxes it paid on fuel mixtures of butane and gasoline. The Claims Court held that the mixture of butane with gasoline did not qualify as “alternative fuel mixtures” for purposes of IRC Section 6426, and therefore did not qualify for the alternative fuel mixture credit.
New Jersey Leaves Petroleum Products Gross Receipts Tax Unchanged for Q2
New Jersey left its petroleum products gross receipts tax unchanged for Q2, 2024 (April 1, 2024 to June 30, 2024).
Fuel
Rate
Gasoline & LPG
$0.318 per gal.
Diesel
$0.358 per gal.
Fuel Oil
$0.124 per gal.
Aviation Fuel
$0.04 per gal.
Other
7% of Gross Receipts
Ohio Set Average Whole Prices for Q2 2024
Ohio posted the Q2 average wholesale prices for calculating the Petroleum Activity Tax (PAT). The gasoline price is $2.087 per gallon, diesel is $2.712 per gallon, and propane is $0.600 per gallon. The PAT rate is 0.65 percent. Motor fuel products are subject to the PAT and excluded from taxable gross receipts for the Ohio Commercial Activity Tax.
South Dakota to Issue E15 Fuel Tax Refund
Licensed retailers of E15 in South Dakota who meet certain alternative fuel compatibility requirements may seek a refund of the $0.05 per gallon tax for E15 sold between 2025 and 2029. The Governor's Office of Economic Development will issue the refund annually. Refund claims must be filed within 30 days after the end of the calendar year to which the refund relates. Refunds that are approved will be notified within 90 days of filing.
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