Welcome to the January 2022 issue of Weaver’s State and Local Tax Digest. This month’s Digest covers a key sales tax ruling in Massachusetts on internet “cookies” and physical presence that puts a limit on the Wayfair decision, a new pass-through SALT workaround in Michigan that could result in tax savings for business owners, and a variety of changes in property taxes that you’ll want to review ahead of your filing season.
SALES TAX UPDATES
California Marketplace Facilitators Fee Collection Requirement Takes Effect
As of January 1, 2022, the California Department of Tax and Fee Administration requires marketplace facilitators to register, collect, and pay the Electronic Waste Recycling Fee, California Battery Fee, Lumber Products Assessment, and California Tire fee. The changes were enacted through A.B. 1402, which was signed into law in September.
Massachusetts Appellate Tax Board Rules that “Cookies” do not Constitute Physical Presence
The Massachusetts Appellate Tax Board (ATB) found that the tax commission could not impose a use tax collection and remittance responsibility on an out-of-state corporation whose presence in Massachusetts was limited to the placement of “cookies” and “apps” specifically on the computers and portable devices of its Massachusetts customers. The ruling included the use of third-party “content delivery networks” (CDNs) that allowed its customers expedited access to its website via servers located in Massachusetts and elsewhere. The board found in U.S. Auto Parts Network, Inc. v. Commissioner of Revenue that “cookies” do not constitute physical presence under Quill Corp. v. North Dakota, and that South Dakota v. Wayfair, Inc. cannot be applied retroactively. Massachusetts in recent years has issued sales tax assessments against taxpayers that they deemed to have nexus in pre-Wayfair tax periods based on the placement of internet cookies. Those who have received assessments should review their compliance history and assessment payments from prior audits to determine if there is an opportunity to seek a refund of tax payments made prior to Wayfair.
Court Finds Texas Sales Tax Manufacturing Exemption for Mining Company
In Hegar v. Texas Westmoreland Coal Co., the Texas Third Court of Appeals ruled that a coal company that mined and processed coal for sale was eligible for the sales and use tax manufacturing exemption and entitled to a refund of sales taxes paid on equipment used in processing the coal. The Court found that “processing”, as used in Texas’s manufacturing exemption in Tex. Tax Code §151.318, also applies to natural resources in situ when the ultimate end-product is tangible personal property. The decision overturns longstanding Comptroller policy to bar otherwise eligible manufacturing equipment from the exemption if the equipment was used in a mining application.
Texas Appeals Court Upholds Manufacturing Exemption for Cash Register Tapes
A Texas Court of Appeals ruled that a company is entitled to a manufacturing exemption from the sales tax paid for electricity used for the manufacture of cash register tapes. The Texas comptroller disallowed the exemption because the printing of third-party advertising on the reverse side of register tapes did not qualify as “manufacturing” under Section 151.318 of the Texas Tax Code. The appeals court reversed the judgment, stating that the statute does not make a distinction about the type of content that may be printed on the tangible personal property and that the imprinting of tangible personal property for sale is manufacturing under the code. The Court concluded that the company’s printing equipment was “necessary and essential” to the actual manufacture of the register tapes it sold.
Arkansas Governor Asa Hutchinson signed two tax bills, SB 1 and HB 1001, as part of a tax reform package that reduces income taxes for individuals and corporations. The tax package reduces top income tax rates gradually from 5.9 percent to 5.5 percent in 2022, 5.3 percent in 2023, 5.1 percent in 2024, and 4.9 percent in 2025. The package reduces top corporate income tax rates from 6.2 percent to 5.9 percent in 2022, 5.7 percent in 2023, 5.7 percent in 2024, and 5.3 percent in 2025. The tax package also increases the annual standard deduction for individuals by indexing it to the consumer price index, creates a personal income tax credit for low-income taxpayers, amends certain exclusions from gross income, and provides for income tax due under the Elective Pass-Through Entity Tax Act.
California Governor Proposes Expansion of SALT Cap Workaround and Repeal of NOL and Credit Limits
California Governor Gavin Newsom submitted his proposed 2022–23 fiscal year budget, which includes two significant tax changes. The budget proposes to expand the SALT cap workaround by allowing the credit for taxes paid by the entity to offset the California tentative minimum tax. The current law limits the pass-through entity tax credit to an individual tax liability over the tentative minimum tax of 7 percent of taxable income. This would allow taxpayers to claim the full amount of the pass-through entity tax credit. The proposal would also repeal the NOL limitation and repeal the $5 million annual cap on business tax credit claims, effective January 1, 2022.
California Legislators Propose Major Tax Increases to Fund Single-Payer Health Care
California assembly members introduced an assembly constitutional amendment that includes significant tax increases to fund single-payer health care in the state. The tax changes proposed in ACA 11 are a 2.3 percent excise tax on gross receipts of companies with annual revenues of more than $2 million; a 1.25 percent payroll tax on businesses with 50 or more employees with an additional 1 percent payroll tax on workers earning more than $49,900; and a progressive surtax ranging from 0.5 percent to 2.5 percent, beginning on personal income of more than $149,509. The bill would also allow the legislature to raise taxes to fund healthcare spending by a simple majority vote rates, avoiding the state’s requirement that tax increases pass the legislature with a two-thirds majority. As a constitutional amendment, ACA 11 needs a two-thirds vote from both houses of the legislature and approval by the voters.
Michigan Governor Signs Pass-Through SALT Workaround
Michigan Governor Gretchen Whitmer signed into law H.B. 5376, which creates a workaround of the federal $10,000 SALT deduction limit. The law allows pass-through entities to pay state and local taxes at the entity level. The entity’s owners then receive a refundable credit on their individual income tax for their share of the tax paid by the entity. The governor vetoed an earlier version of the state’s entity-level taxation bill, citing the cost of implementation.
The Pennsylvania Supreme Court ruled that the state’s $2 million limit on net loss carryovers (NLC) violated the state constitution’s Uniformity Clause. In 2001, the state of Pennsylvania capped the use of NLCs at $2 million per taxpayer. General Motors had accumulated NLCs in excess of $2 million and wanted to apply the excess NLCs to reduce their 2001 Pennsylvania tax liability to zero. GM brought suit to challenge the cap on the grounds that the NLC cap violated the Due Process Clause of the U.S. Constitution and the Uniformity Clause of the Pennsylvania Constitution due to the fact that taxpayers with less than $2 million of taxable income were able to utilize all of their NLC. In lieu of severing the NLC cap, the Pennsylvania Supreme Court severed the NLC deduction provision in its entirety. To remedy the discrimination faced by GM under the Due Process Clause, the court remanded the case to the Finance and Review Board to recalculate GM’s corporate net income tax without capping its NLC deduction and to issue a refund based on that recalculation.
PROPERTY TAX UPDATES
California Taxpayers Can Challenge BIDs without Exhausting Administrative Proceedings
The California Supreme Court ruled in a unanimous decision that California taxpayers can file lawsuits to challenge business improvement districts (BIDs) without first exhausting administrative proceedings. The court overturned a Court of Appeal decision that concluded that a taxpayer’s failure to present their objections to BIDs at the appropriate public hearings meant they had not exhausted their extrajudicial remedies and that the court could not decide the claims on the merits. The Court concluded that the “exhaustion doctrine” did not apply in the matter. The court concluded that the opportunity to participate in a public comment session regarding a BID proposal does not involve procedures conducive to the “submission, evaluation,” and especially the “resolution” of disputes comparable to those that are commonly found in administrative remedies that must be exhausted.
California Issues Property Tax Information on Disaster Relief Intracounty Base Year Value Transfers
The California Board of Equalization (BOE) issued property tax information on disaster relief intracounty base year value transfers. The BOE states that S.B. 303, which took effect October 5, 2021, extends the five-year period to acquire or newly construct replacement property to seven years if (1) the last day to transfer the base year value was on or after March 4, 2020, but on or before the earlier of either the COVID-19 emergency termination date or March 4, 2022, or (2) the disaster occurs on or after March 4, 2020, but on or before the earlier of the COVID-19 emergency termination date or March 4, 2022. S.B. 303 makes these provision applicable to the determination of base year values for the 2015-16 fiscal year and fiscal years thereafter. The law also clarifies that “qualified property” is property that is substantially damaged or destroyed by a disaster proclaimed by the Governor.
Florida Removes Penalty for Late Prepayment of Estimated Property Tax by Installment Method
The Florida Department of Revenue (DOR) issued an informational bulletin on the prepayment of estimated property tax by the installment method. Effective July 1, 2021, tax collectors must accept a late payment of the first installment payment through July 31 without a penalty. Previously, the tax collector had the option to accept a late payment of the first installment through July 31, but the late payment had to be accompanied by a penalty of 5 percent of the amount of the installment due.
Louisiana Issues Emergency Rule on Ad Valorem Property Tax Assessments
The Louisiana Tax Commission issued an emergency rule for ad valorem property taxes, effective January 1, 2022, in order for ad valorem tax assessment tables to be disseminated to property owners and local tax assessors no later than the statutory valuation date of record of January 2022. The emergency rule also includes measures on the criteria to determine the fair market value of real and personal property; general information on assessments; and information on policies and procedures for assessment and change order practices.
Michigan Eases Process for Qualified Manufacturers to File for Personal Property Tax Exemptions & Expands the Personal Property Exemption Amount for Qualified Personal Property
Michigan Governor Gretchen Whitmer signed into law several bills (H.B. 5502, H.B. 5503, H.B. 5504, and H.B. 5505) that together change the process for filing and review of personal property tax exemptions for qualified manufacturers. Some key changes under the new law are that beginning in 2023, the personal property tax exemption will remain in effect until the personal property is no longer qualified personal property.
The exemption documents must be delivered to the local assessor by February 20th of each year for any year the exemption is claimed before 2023 and the first year the exemption is claimed in a year after 2022. February 20th is the deadline for rescinding an exemption claim, and the local assessor must immediately remove the exemption upon receipt of a timely filed rescission form. Additionally, H.B. 5351 increased the personal property exemption to $180,000 from $80,000. To avoid double dipping in multiple exemptions, Michigan enrolled H.B. 5506, which prohibits the issuance of a new industrial facilities exemption certificate after December 30, 2021 for any personal property that qualifies as eligible manufacturing personal property.
Texas Comptroller Publishes Report of Property Tax Bills Passed during 87th Texas Legislature
The Texas Comptroller of Public Accounts issued a report titled Texas Property Tax Law Changes as of December 2021. Some of the bills passed in the 87th Texas Legislature, however, still require approval through a vote scheduled in 2022. For example, a proposed constitutional amendment to increase the existing mandatory homestead exemption on school district property taxes from $25,000 to $40,000 will be put before the voters at an election to be held May 7, 2022. Another notable bill passed during the 87th Texas Legislature includes SB 1449, which amends the taxable value below which tangible personal property held or used for the production of income is exempt from property taxation from $500 to $2,500, effective January 1, 2022 and subsequent years.
Introducing the Executive Resource Center
To assist executives as they master the ongoing challenges their companies face, Weaver has launched a new Executive Resource Center featuring helpful tools and resources on topics including cybersecurity and privacy, environmental, social and governance (ESG), financial reporting, leadership and culture, and mergers and acquisitions. Add this page to your bookmarks and check back regularly — we look forward to seeing you!
The IRS Issue Guidance about the Early Termination of the Employee Retention Credit
The Internal Revenue Service (IRS) recently provided guidance to employers about the early termination of the Employee Retention Credit (ERC). With recent legislative changes, unless the employer is a “recovery startup business,” the ERC is no longer available through the end of the 2021 calendar year and now applies only to wages paid after March 12, 2020, and before October 1, 2021.