Welcome to the December 2023 issue of Weaver’s State and Local Tax Digest. This month's digest includes new tax legislation in several states on pass-through entity tax (PTE), sourcing rules, and sales tax minimum thresholds.
INCOME AND FRANCHISE TAX UPDATES
Hawaii Updates Guidance on Elective Pass-Through Entity-Level Tax
The Hawaii Department of Taxation issuedan update on administrative guidance that replaces earlier guidance for pass-through entities to make an annual election to pay a pass-through entity-level tax (PTET). The guidance includes discussions on eligibility, how to make the election, and calculating the tax. For tax year 2023, estimated payments are not required; however, the PTE tax must be made by the 20th day of the fourth month following the close of the taxable year to avoid penalties and interest.
Indiana Updates Bulletin on Apportionment and Income
The Indiana Department of Revenue updated Income Tax Information Bulletin #12 to clarify apportionment and business and nonbusiness income. The guidance also provides information for S corporations’ pass-through entity tax and states that this tax and other withholding taxes are subject to estimated tax penalties. The bulletin also repeals the Utility Receipts Tax.
Louisiana Issues Guidance on Tax Revisions for Pass-Through Entity-Level Tax
The Louisiana Department of Revenue issued guidance on the recently enacted H.B. 428, revising aspects of Louisiana law permitting certain pass-through entities to pay a pass-through entity-level tax (PTET). The updates also add an easier option for terminating the PTET election prospectively and provide additional information regarding the required termination form and corresponding deadlines; the guidance provides that the entity and its successors are prohibited from making another election for five tax years. The PTET income exclusion is expanded to include trusts and estates that are shareholders, members, or partners in an entity that made a PTET election. The updated provisions are effective for tax periods beginning on or after January 1, 2023.
Maine Upholds “Market Member” Sales Factor Sourcing Method
The Maine Supreme Judicial Court affirmed a lower court’s decision to source receipts from services by the “market member” method, which sources services by looking through to the customer’s customer. In Express Scripts Inc. v. State Tax Assessor, Me. Sup. Jud. Ct., No. BCD-22-331, the taxpayer sold prescription drugs through mail order delivery and sold various prescription-related and claim adjudication and verification services to health insurers, health maintenance organizations, and employers. The state argued that the services were received where the ultimate individuals received the service, while the taxpayer argued that its customers were the businesses with which it had contracted. The courts found that the correct method was to source the receipts based on where the members receiving the services were located by using the location of the retail pharmacies that were used.
Massachusetts Issues Guidance on Millionaire’s Tax and Brownfields Tax Credit
The Massachusetts Department of Revenue issued guidance that explains the provisions on the state’s 4 percent surtax on income of more than $1 million and the five-year extension of the brownfields tax credit. The guidance discusses how to determine the three income parts in the tax on gross income. It also explains the legislative revisions to the brownfields tax credit, which require the taxpayer to “commence and diligently pursue” the relevant environmental response action(s) on or before August 5, 2028 and that the net response and removal costs must be incurred before January 1, 2029.
New Jersey Updates Bulletins for CBT Law Changes
New Jersey issued a series of updated bulletins on the state’s changes to New Jersey’s corporation business tax and combined groups tax. This includes a bulletin on the changes for captive investment companies, real estate investment trusts, and regulated investment companies; a bulletin on the changes for banking corporations and combined returns; a bulletin on the changes for banking corporations for privilege periods ending on or after July 31, 2020; and a bulletin on the changes for combined groups.
New York Tax Appeals Tribunal Upholds GRT Tax Refund Denial
The New York Tax Appeals Tribunal upheld a determination by an administrative law judge that denied petitioners’ refund claims for gross receipts taxes (GRT) paid in 2014 and 2016. The administrative law judge concluded that the petitioners did not establish that utility customers were charged twice for the GRT. The tribunal also agreed with the tax division’s argument that petitioners may not receive a refund of GRT because the law does not impose the tax on them but rather imposes it on utilities. The tribunal also rejected the argument that the city’s sales tax on energy delivery services was not authorized.
Texas Comptroller Addresses No-Tax-Due Total Revenue Threshold and Returns
The Texas Comptroller issued a Tax Policy Newsletter that addresses S.B. 3, which increases the no tax due revenue threshold and eliminates the “No Tax Due” report beginning with Texas Report Year 2024. While a No Tax Due Report will not be required, some of the entities will now require a long form or EZ computation form and possibly still require Public Information Report (PIR) or Ownership Information Report (OIR). The newsletter provides additional details on what reports will still be needed for some of the entities that currently file a No Tax Due Report.
Texas Voters Approve Prohibition on Wealth Tax
Texas voters approved Proposition No. 3, an amendment to the state constitution that prohibits the “imposition of an individual wealth or net worth tax, including a tax on the difference between the assets and liabilities of an individual or family.” The amendment is pending certification.
Washington Business and Occupation Tax May Include Certain Income from Patents
The Washington Department of Revenue issued guidance explaining how certain income from patents may be subject to the business and occupation (B&O) tax. If the income received from patent royalties or patent sales is deemed to be business income, such income will be subject to the B&O tax. The guidance provides examples of income that would be subject to the B&O tax and income that would not be subject to this tax.
SALES AND USE TAX UPDATES
California Lowers Threshold for Use Tax Collection
California enacted A.B. 1097, which amends the registration requirements for use tax collection. Purchasers are required to register for use tax if making more than $10,000 in taxable purchases during a calendar year if the tax has not been paid to a retailer. Previously, the threshold was at least $100,000 in gross receipts per calendar year. Purchases of vehicles, vessels, or aircraft are excluded from this threshold.
California Extends Sales Tax Exemption for Fuel Sold to Water Common Carriers
California enacted A.B. 543, which extends the sales and use tax exemption for fuel and petroleum products sold to water common carriers through December 31, 2028. This exemption applies to fuel purchased by a water common carrier after reaching its first out-of-state destination. To qualify for exemption, the fuel must be for immediate shipment outside California, consumed after the first out-of-state destination, and sold to a water common carrier holding a seller’s permit or fuel exemption registration number. Fuel vendors need to obtain an exemption certificate from the purchaser to document the exempt sale.
Louisiana enacted H.B. 171, which amends the requirements for dealers and marketplace facilitators to collect and remit sales and use taxes. The economic nexus threshold of 200 or more transactions has been removed. This bill also updates the economic threshold for marketplace facilitators to $100,000 in retail sales. Wholesale and resale sales are now excluded from the $100,000 threshold for marketplace facilitators.
Minnesota Enacts Retail Delivery Fee
Minnesota enacted H.B. 2887, which implements a retail delivery fee of $0.50 per taxable transaction for retail deliveries in Minnesota of more than $100, effective, July 1, 2024. The fee is applied on a per-transaction basis, regardless of the number of shipments needed for delivery. Retailers may either pay the fee or collect the fee from the purchaser.
New Mexico Repeals Advanced Energy Tax Credit Regulation
Effective September 26, 2023, New Mexico repealed administrative regulation 3.13.8 NMAC on the advanced energy tax credit that expired July 1, 2023. The advanced energy tax credit previously allowed a tax credit for taxpayers which held an interest in a qualified electric generating facility.
New Mexico Reduces Gross Receipts Tax Rate
New Mexico reduced the statewide portion of the Gross Receipts Tax from 5.125 percent to 4.875 percent. The rate change is effective July 1, 2023. The rate reduction was enacted as part of legislation signed by Gov. Michelle Lujan Grisham in 2022.
North Carolina Expands Sales Tax Exemption for Qualified Vessels
The North Carolina Department of Revenue issued a directive that provides the interpretation of the sales and use tax exemption for certain items used by boats transporting freight, effective November 1, 2023. The exemption applies to sales of fuel and other tangible personal property for use or consumption by a water-going vessel in the transport of freight or passengers for hire exclusively for hire.
South Dakota Eliminates Transaction Count Threshold for Economic Nexus
South Dakota enacted S.B. 30, which eliminates the 200 transactions threshold for economic nexus for remote sellers, effective July 1, 2023. Remote sellers with more than $100,000 in gross sales in South Dakota in the previous or current calendar year are required to be licensed and remit South Dakota sales tax.
South Dakota Cuts Statewide Sales Tax Rate
South Dakota enacted H.B. 1137, which reduces the statewide sales tax rate to 4.2 percent from 4.5 percent. The rate is effective July 1, 2023. The state tax rates affected by the change include the sales and use tax; excise tax on farm machinery and farm attachment units; the amusement device tax; and the motor vehicle gross receipts tax. The law includes a sunset clause which repeals the rate reduction effective June 30, 2027.
Tennessee Reminds Taxpayers to Renew Agricultural Exemption Certificates
The Tennessee Department of Revenue reminded taxpayers that agricultural certificates of exemption expire every fourth year. Certificates for the current period expire on December 31, 2023. Taxpayers must verify that they still qualify for the exemption for the Department to reissue a certificate.
Texas Rules on Taxability of Employee Health Benefit and Retirement Administration Services
The Texas Comptroller of Public Accounts issued a private letter ruling that the taxpayer's Flex Spending Account and the Consolidated Omnibus Budget Reconciliation Act (COBRA) administration services are not taxable services; Affordable Care Act (ACA) Comprehensive and Eligibility Verification Audit services are taxable insurance services; and the ACA Reporting-Only service is a taxable data processing service. The Comptroller ruled that the taxpayer's Retirement Plan Administration and 401(k) Plan Recordkeeping services are not subject to sales and use tax.
Texas Issues Memo on Taxability of Electronic Games and Content
The Texas Comptroller of Public Accounts issued a memo as guidance on the taxability of electronic games and associated content, including downloadable content and virtual currencies. The memo states that existing statutes, rules, and policy decisions provide those electronic games and associated content are subject to Texas sales and use tax as an amusement service. Electronic games and associated content may be participatory games similar or games of skill such as identified in Tex. Admin. Code § 3.298(a)(1)(E)(iv). The purchase of electronic games and associated content, including virtual currencies purchased for use within the electronic game is taxable as an amusement service regardless of whether access is purchased directly through a game’s website or a redeemable card. Membership fees, subscription fees, or similar charges for access to an electronic game or associated content are also taxable as amusement services.
PROPERTY TAX UPDATES
Texas Voters Approve Property Tax Relief
Texas voters approved Proposition No. 4, which amends the state constitution to “authorize the legislature to establish a temporary limit on the maximum appraised value of real property other than a residence homestead for ad valorem tax purposes; to increase the amount of the exemption from ad valorem taxation by a school district applicable to residence homesteads from $40,000 to $100,000; to adjust the amount of the limitation on school district ad valorem taxes imposed on the residence homesteads of the elderly or disabled to reflect increases in certain exemption amounts; to except certain appropriations to pay for ad valorem tax relief from the constitutional limitation on the rate of growth of appropriations; and to authorize the legislature to provide for a four-year term of office for a member of the board of directors of certain appraisal districts.” These changes aimed to provide property tax relief estimated to be roughly $1,300 on 2023 tax bills for the typical homeowner.
FUELS AND EXCISE TAX UPDATES
Illinois Increases Municipal Motor Fuel Tax Rates by 3 Cents
Illinois posted changes to municipal motor fuel tax rates, effective January 1, 2024. The changes increase the tax rates from $0.00 per gallon to $0.03 per gallon and apply to Bensenville (Cook County); Bensenville (DuPage County); Lemont (Cook County); Lemont (DuPage County); and Lemont (Will County).
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Podcast: Direct Pay, Don’t Overpay!
On this episode of Weaver: Beyond the Numbers,Shane Stewartsits down withMayur Naikand Tony Burgess to discuss the benefits of direct pay to companies.
Alcohol Mixture Credit Case Delivers Blow to Taxpayers Based on Economics of Transactions and the Tax Credits
The biofuels industry suffered a blow in the U.S. District Court for the Southern District of New York in a case that pitted the alcohol fuel mixture credit against the economic substance doctrine. The case is Chemoil Corp. v. U.S., No. 19-CV-6314-LTS-JW.
