Welcome to the latest edition of Weaver’s State and Local Tax Digest. This month’s issue covers a number of proposed tax cuts as states start their legislative sessions, including an expansion of the SALT workaround in California and New Jersey as well as tax cuts in Idaho and Utah.
LEGISLATIVE ROUNDUP
Alabama Enacts Electing Pass-Through Entity Rule
Alabama adopted Rule 810-3-36-.01, Electing Pass-Through Entity Returns, as guidance for filing an electing pass-through entity return and the payment of tax. For tax years beginning on or after January 1, 2021, a pass-through entity may elect to be taxed as an “electing pass-through entity,” which is defined as a payment of Alabama income tax made by the electing pass-through entity on behalf of its owners, members, partners, or shareholders calculated on the owner’s, member’s, partner’s, or shareholder’s pro rata or distributive share of the pass-through entity's income. The guidance covers key definitions, making an election to be an electing pass-through entity, transitional rules, and the payment of the tax.
California Expands SALT Workaround and Repeals NOL and Business Credit Limits
California Governor Gavin Newsom signed into law SB 113, which expands the state’s workaround of the federal deduction limit for state and local taxes (SALT) and repeals the net operating loss (NOL) suspension and the $5 million business credit limits that were implemented in 2020. For the SALT cap workaround, the law allows the credit for taxes paid by the entity to offset the California tentative minimum tax of 7 percent of taxable income for tax years beginning on or after January 1, 2021. It requires the credit to be applied against the net tax after credits for taxes paid to other states for tax years beginning on or after January 1, 2022.
Idaho Governor Brad Little signed into law HB 436, which enacts tax cuts of $600 million in $350 million in one-time rebates and $250 million in income tax reductions for individuals and businesses. The law reduces the top income tax rate from 6.5% to 6% for individuals and businesses and reduces the number of tax brackets to four. The bill follows Little’s budget proposal in January.
Mississippi House Passes Income Tax Phase Out
The Mississippi House of Representatives passed the first version of HB 531, which would phase out its personal income tax, increase the general sales tax rate, reduce the sales tax rate on groceries from 7% to 4% by 2028, and reduce the automobile tax over six years. The proposal would also increase from 7% to 8.5% the general sales tax; the sales tax on alcohol; and the tax on music, games, cellphone ring tones and other products delivered electronically.
New Jersey Expands SALT Workaround
Governor Phil Murphy of New Jersey signed into law S. 4068, which revises the calculation for the state’s elective pass-through entity business alternative income tax to calculate the tax based on the entity’s gross income tax instead of on the entity’s income derived from New Jersey only. The change, effective January 1, 2022, expands the workaround to subject more income to the tax and to create a larger income tax credit.
Utah Legislature Passes Personal and Corporate Income Tax Cuts
The Utah legislature passed S.B. 59, which reduces Utah’s personal and corporate income tax rates from 4.95% to 4.85%. The bill also establishes a nonrefundable earned income tax credit equal to 15% of a claimant’s federal earned income tax credit and increases the income-based phaseout for eligibility for the social security benefits tax credit.
INCOME AND FRANCHISE TAX UPDATES
California Limits Protection of PL 86-272 on Internet Sales
The California Franchise Tax Board (FTB) revisedhow it taxes certain internet activities previously protected under PL 86-272, which has been codified as 15 U.S. Code Section 381. PL 86-272 prohibits states from taxing the net income of out-of-state businesses on income derived within the state if the only business activities within the state are the solicitation of orders for sales of tangible personal property. The FTB’s technical memorandum applies the Multistate Tax Commission’s PL 86-272 analysis from August 2021 to 12 common fact patterns and found that PL 86-272 protections do not apply to an array of internet business activities.
California Requires Information on Unclaimed Property Reporting on Business Returns
Renewed efforts to enforce compliance with California’s unclaimed property law took effect for 2021 tax reporting. The California Franchise Tax Board recently enacted unclaimed property reporting requirements along with the additional information sharing could increase the likelihood that business taxpayers will face an audit or additional inquiries on unclaimed property from the State Controller’s Office (SCO).
Massachusetts Issues Notice on Extensions of Time to File Tax Returns
The Massachusetts Department of Revenue (DOR) issued a notice on the extension of time to file tax returns. The notices states that an extension of time to file will only be valid if certain payment requirements are met. It also states that individual taxpayers, partnerships, and fiduciaries receive an automatic six‑month extension of time to file income tax returns if they have paid 80 percent of the total tax liability by the original return due date. Corporate excise taxpayers receive an automatic extension of time to file their tax returns as long they have paid the greater of (1) 50 percent of the total amount of tax ultimately due or (2) the minimum corporate excise by the original due date for filing the return. See TIR 15-15 for more information. Corporate excise taxpayers not filing as part of a combined report receive an automatic 6-month extension to file. These taxpayers generally include S Corporations, Security Corporations, Financial Institutions, Insurance Companies, Urban Redevelopment Companies, and Business Corporations. See TIR 15-15 for more information.
North Carolina Holds Denial of Deduction for Receivables of Affiliates is Unconstitutional
The North Carolina Office of Administrative Hearings (OAH) held in Philip Morris USA, Inc. v. NC Department of Revenue that the deduction from the franchise tax for receivables made to affiliated corporations not doing business in North Carolina violated the dormant Commerce Clause of the U.S. Constitution.
Oregon Changes CAT Filing for Non-Calendar Year Filers
Oregon implemented several changes for Corporate Activity Tax filing for 2022. For tax years 2021 and forward, taxpayers that use a federal tax year other than a calendar year must prorate the annual registration, filing, and payment thresholds based on the number of days in the short-year return; file a short period return if the taxpayer reaches the prorated filing threshold; prorate the $500,000 cap on compensation to a single employee when calculating labor costs included in the short-year return; file the short-year return, if required, by April 15, 2022; file a short year return on forms for the tax year in which the short year ends. Short year periods ending in 2021 should be filed on the 2021 tax forms. An extension is available.
PROPERTY TAX UPDATES
Kentucky Freezes Vehicle Property Tax Rate
Kentucky Governor Andy Beshear signed an executive order stopping increases in the vehicle property taxes by subtracting from the value assessment any increase in value since January 1, 2021. The governor cited an approximately 40 percent increase in automobile values over the past year.
Maine Adopts Regulations on Telecommunications Excise Tax, Property Tax Exemption
Maine adopted a regulation on the telecommunications excise tax. The rule states that Maine Revenue Services (MRS) is responsible for assessing the tax on qualified telecommunications equipment owned or leased by a telecommunications business. The excise tax rate is equal to the mill rate of the municipality where the equipment is located. The rules also states that property subject to the telecommunications excise tax is exempt from municipal property tax. It also states that the MRS will consider the three standard approaches for valuing all property subject to the tax. Returns must be filed by December 31, and the MRS will mail assessments by March 30 of the year following the return due date. The tax payment is due by August 15 following the March 30 assessment.
Oregon to Hold Meeting on Recalculation of Maximum Assessed Value
The Oregon Department of Revenue (DOR) announced that it will hold the second in an ongoing series of Rules Advisory Committee (RAC) meetings for property taxes on March 28. The committee will help the department develop administrative rules to determine how to recalculate the maximum assessed value (MAV) of properties participating in partial exemptions of assessed value (AV). The RAC will also be briefed on a recent study of tax accounts commonly affected by partial exemptions of AV. They will consider options for potential draft rule language and practical examples of the outcome of each option for taxpayers.
Texas Issues Minimum Property Value for Protest Hearing
The Texas Comptroller of Public Accounts issued a notice of eligibility of appraised value, which determined that a property's minimum appraised value for the 2022 tax year, as determined by the local appraisal district, must be at least $52,978,200 to be eligible for a protest hearing in front of a local appraisal review board special panel for that tax year.
EXCISE TAX UPDATES
Arkansas Determines Kerosene for Off-Road Use Subject to Sales Tax
The Arkansas Department of Finance and Administration determined in a Novemberletter rulingthat a taxpayer’s sale of kerosene for off-road use was subject to sales and use tax. The DFA reasoned that the law specifically excludes kerosene from the definition of “special distillate fuel” for the purpose of the excise tax. It also stated that kerosene sold for off-road use is not subject to the special distillate fuel tax exemption from the state’s gross receipts tax.
California Amends Regulation on Tax Paid Twice on Diesel Fuel
California amended Regulation 1435 to clarify when a supplier that paid tax on diesel removed from an approved terminal at the rack may claim a credit or refund for tax paid twice on the same amount of diesel. The change brings the regulation into alignment with Section 60501 of the California Revenue and Taxation Code. The amendment, effective February 3, 2022, also renamed the Regulation “Tax Paid Twice on the Amount of Diesel Fuel Removed from an Approved Terminal.”
Minnesota to Accept Petroleum Tax Licenses Renewal Online Only
Beginning March 1, 2022, petroleum distributors in Minnesota must renew their petroleum tax license and make their payment online. The state will no longer accept paper Form PDO-100 license applications. Minnesota will mail distributors instructions in March and will mail special fuel dealers instructions in August.
Ohio Petroleum Suppliers Licensing Deadline was March 1
The Ohio Department of Taxation, Business Tax Division reminded petroleum activity tax (PAT) practitioners and taxpayers that all suppliers are required to renew their PAT supplier's license each year on or before March 1. The following license fees apply to suppliers: $300 importers; $1,000 for racks and refineries; and $1,000 for rack/refinery and importers. The licensing fee is $1,000 total if an applicant qualifies as both rack/refinery and an importer.
Washington Updates Definition of “Biofuel” for Use Tax Exemption
Washington amended its definition of “biofuel” to incorporate 2021 legislation that provides a written definition of “biofuel” to replace an outdated statutory reference. For purposes of the use tax exemption, the 2021 legislation defines “biofuel” as a “liquid or gaseous fuel derived from organic matter intended for use as a transportation fuel, including, but not limited to, biodiesel, renewable diesel, ethanol, renewable natural gas, and renewable propane.”
SALES TAX UPDATES
Kansas Revises Business Tax Guide for Motor Vehicle Transactions
The Kansas Department of Revenue issued a revised information guide on business taxes for motor vehicle transactions. The publication discusses sales by dealers; sales between non-dealers; leases and rentals; compensating use tax; non-taxable vehicle transactions; exempt sales; repairs and service; related transactions; additional taxes and requirements; and reporting and paying taxes.
Maine Updates Guidance on Out-of-State Seller Registration
Maine updated its guidance on out-of-state seller registration. The guidance made changes to the substantial physical presence requirements and added a section on the mandatory registration of marketplace facilitators.
North Carolina Waives Excise Taxes on Relief Vehicles before Winter Storm
North Carolina issued an executive order on January 19, 2022, declaring a state of emergency due to a potentially significant winter storm and providing excise tax relief. The order exempted vehicles supporting emergency relief efforts from obtaining a temporary trip permit, paying a fee, and filing quarterly fuel tax returns. The exemptions included non-participants in the state’s International Registration Plan and International Fuel Tax Agreement. The executive order was effective for the lesser of 30 days or the duration of the emergency.
Texas PLR Provides Guidance on Taxation of Service Charges for Medical Records Retrieval
The Texas Comptroller of Public Accounts has provided guidance on the sales and use taxation of medical records retrieval service charges. Texas Private Letter Ruling No. 202201017L found that a Texas-based medical records retrieval company’s custodian fee, which is a charge to reimburse the company for charges it paid to medical service providers to provide medical records, is not taxable because the medical records obtained by the company and provided to the patient or patient's representative are part of a medical service provider’s nontaxable medical service. The ruling also stated that the company’s authorization fee is not taxable because these services are not specifically listed as taxable services under Texas law, but the company's copy fee is taxable because these services are taxable data processing services as they involve data entry, compilation, and manipulation of information.
Leanne Sobel Joins Weaver as Director in State and Local Tax Services
Weaver has added Leanne Sobel as a director in its expanding national state and local tax services practice. An attorney with more than 15 years’ experience, Sobel focuses on regulatory and transaction tax matters and related U.S. Customs regulations affecting trading of refined petroleum products and other energy commodities.
On-Demand Webinar: SALT Taxes for the Oil & Gas Industry, Property and Sales/Use Taxes
Watch on-demand and gain insight on the state and local taxes that oil and gas organizations should consider in 2022. Our SALT professionals provide an overview of property taxes, sales taxes and exemptions unique to this industry.