Welcome to the March 2023 issue of Weaver’s State and Local Tax Digest. This month we highlight several important stories including California's delay of its partnership tax capital reporting requirements and South Dakota's increase of the threshold on property tax refunds for elderly and disabled taxpayers.
INCOME AND FRANCHISE TAX UPDATES
Have You Made Your PTET Election?
Currently, 31 states have enacted an elective pass-through entity tax for 2022. As the tax filing deadline approaches, some states require an election to be made by the due date of the return or extension request. Most states also require payments to be made. Taxpayers wishing to make pass-through entity tax elections for 2022 should review each filing requirement to determine when elections have to be made.
Filing Deadlines Extended for California, Georgia, and Alabama
The IRS extended tax filing deadlines to October 16 for select counties in California, Georgia, and Alabamain response to severe storms. California also extended state tax filing deadlines to October 16, Georgia extended state tax filing deadlines to May 15, and Alabama extended state tax filing deadlines to October 16.
Arizona Issues PTE Guidance
The Arizona Department of Revenue issued guidanceon its elective pass-through entity (PTE) tax. The guidance covers implementation issues, including making the election, eligibility, claiming the PTE credit, income subject to the PTE payment calculation, carryforwards, and tax forms.
California FTB Delays Partnership Tax Capital Reporting by a Year
The California Franchise Tax Board (FTB) delayed the reporting requirement for a partner’s tax basis capital account on Schedule K-1 (565) and Schedule K-1 (568) by a year. Beginning for tax year 2023, taxpayers who file Form 565 or Form 568 to report their partners’ or members’ capital accounts on the Schedule K-1 (565) and the Schedule K-1 (568) must use the tax basis method as determined under California law. For the 2021 and 2022 tax years, taxpayers who file Form 565 or Form 568 to report their partners’ or members’ capital accounts on Schedule K-1 (565) or Schedule K-1 (568) may use the tax basis method as determined under federal law, as reported on Schedule K-1 (Form 1065), or by using the tax basis method as determined under California law.
California OTA Rules that State Can Tax Nonresident On Indirect Interest Sale
The California Office of Tax Appeals ruled that a nonresident was liable for tax on a distributive share of gain from the sale of a partnership interest because it constitutes California source income. The OTA reasoned that because the nonresident’s holding company and the partnership constituted a unitary business, the gain is properly considered apportionable business income. Under the unitary combination method, it is apportioned to California at the nonresident’s holding company level using its share of the partnership’s apportionment factors. The apportioned gain retains its character as California source income as it flows up to its ultimate taxpaying owners.
Idaho Conforms to Federal Tax Code
Idaho Gov. Brad Little signed into law House Bill H0021, which conforms Idaho’s tax law to the Internal Revenue Code as of January 1, 2023. The conformity includes IRC Section 179 but does not include bonus depreciation. The bill also does not conform to the IRC Section 85 federal unemployment exemption for tax year 2020.
Minnesota Enacts Federal Tax Conformity
Minnesota Gov. Tim Walz signed into law HF 31, a bill that conforms the state’s tax laws that reference either federal adjusted gross income or federal taxable to changes in the Internal Revenue Code through December 15, 2022. With conformity, many of the federal income tax nonconformity modifications reported on Minnesota tax returns from 2017 through 2021 are no longer required. Taxpayers may need to file amended returns to determine their correct Minnesota taxable income. The statute of limitations to claim a refund has been extended to December 31, 2023 for amended returns filed because of a law change in this tax bill. The Minnesota Department of Revenue provided taxpayer references related to conformity.
New Jersey Issues 2022 Tax Law Summaries
The New Jersey Division of Taxationissuedits summary of 2022 tax legislation. This includes the new requirements for partnerships, the expiration of a COVID-related extension, and the elimination of the New Jersey S corporation elections.
Ohio Expands Deduction for Bad Debt
Ohio Gov. Mike DeWine signed into law HB 223, which expands current law to allow vendors to deduct sales tax remitted for bad debts on credit cards when the debts were charged off as uncollectible on the books of the lender who owns the account or an interest in an account receivable. This applies to private label credit account for debts charged off after July 1, 2023.
Texas Comptroller Updates Apportionment Rule
The Texas Comptroller of Public Accountsproposedamendments to 34 TAC §3.591 to modify the definition of “location of performance” by providing that “a service is performed at the location or locations where the taxable entity’s personnel or property are doing the work that the customer hired the taxable entity to perform.” This modifies the prior “receipt-producing, end-product act” standard. The proposed rule also provides that if costs are considered they should be “limited to the direct costs of doing the work that the customer hired the taxable entity to perform and should not include any costs that are not directly used to provide a service to the customer. This replaces the “directly related to the service and not overhead costs” standard. The proposed amendments reflect the Texas Supreme Court’s opinion in Sirius XM Radio, Inc. v. Hegar, No. 20-0462 (Tex. March 25, 2022).
Texas Issues Memo on Federal Statutes and Regulations on “Internal Use Software”
For purposes of the R&D Tax Credit and sale tax exemption, the Texas Comptroller of Public Accounts issued amemosummarizing the various federal statutes and regulations relating to Internal Use Software (IUS) that the comptroller recognizes as incorporated by reference into Texas law, as described in the August 2022 amendments to Rules 3.340 and 3.599.
SALES AND USE TAX UPDATES
California to End Use of Limited Access Codes for Filing on April 1, 2023
The California Department of Tax and Fee Administration (CDTFA) is endingthe use of Limited Access Codes for online filing on April 1, 2023. The CDTFA stopped issuing the codes for new business activity registrations in June 2022 and new business registrations are now required to complete the Sign Up Now process to create a username and password or use a previously created logon to complete any new registrations.
Colorado Adopts Delivery Fee Rules
The Colorado Department of Revenue adopted two final rules to implement the 27-cent retail delivery fee, which became effective on July 1, 2022. One rule implements the 27-cent fee on “deliveries by motor vehicle to a location in Colorado with at least one item of tangible personal property subject to state sales or use tax.” Another rule clarifies the penalties for noncompliance.
Hawaii Revises Tax Guidance on Medical and Dental Services
The Hawaii Department of Taxation issued a revised tax facts publication on how the state’s general excise tax (GET) applies to medical and dental services. The GET is a privilege tax imposed on the gross income received by the person engaging in business activity in the state. Gross income from medical and dental services is taxed at the rate of 4 percent (plus the county surcharge if applicable). The tax facts include updated common questions on the GET as it applies to medical services.
Iowa Implements Online Tax Portal
Iowa implemented its GovConnectIowa online portal in November 2022. Taxpayers can now use it to register for new permits and licenses; file tax returns and reports for sales, use, withholding, and fuel taxes; make payments using a bank account or credit card; request a payment plan for business taxes; view and respond to correspondence from the Department online; and maintain business tax accounts.
Pennsylvania e-Tides Tax Filing System Ends February 24, 2023
Pennsylvania is transitioning its e-filing system from e-TIDES to myPATH. February 24, 2023 was the last day to submit a corporate tax payment, file an employer withholding tax return or payment, or file a sales tax return or payment using the e-TIDES system.
Texas Appeals Court Finds Taxpayer Not Entitled to Sales and Use Tax Refund
A Texas Court of Appeals found that a taxpayer was not entitled to a sales and use tax refund on the proceeds of a sweepstakes it provided. The appeals court, in upholding a lower court’s summary judgment, noted that the charging of fees for sweepstakes entry was the collection of taxable “admission fees,” and the taxpayer was not entitled to a refund. The court also held that the taxpayer did not meet its summary-judgment burden to establish its entitlement to an exemption.
PROPERTY TAX UPDATES
South Dakota Raises Thresholds for Tax Refunds for Elderly and Disabled Taxpayers
South Dakota Gov. Kristi Noem signed into law HB 1034, which increases income thresholds for refunds of real property taxes for low-income elderly and disabled taxpayers. The maximum income for single-member households to receive a refund was raised from $13,653 to $14,949. The maximum income for multiple-member households to receive a refund was raised from $18,465 to $20,141.
The Illinois legislature passed a law to provide a $1.50 per gallon credit for sustainable aviation fuel. The credit applies to domestic flights from June 1, 2023 through May 31, 2033. Airlines purchasing or using sustainable aviation fuel on domestic flights can obtain a tax credit from June 1, 2023 through May 31, 2033. Airlines in Illinois will be able to claim the tax credit up to a set quota dependent on the amount they spend on domestic conventional jet fuel that year. The credit will initially be available to sustainable aviation fuel produced from both imported and domestic feedstocks. Palm-derived fuel is excluded from the credit. Effective June 1, 2028, only fuel produced from domestic feedstocks will be eligible for the credit. Soybean-oil derived sustainable aviation fuel will be capped at 10 million gallons per year.
Illinois Appeals Court Says Book-Out Transactions Are Subject to Fuel Tax
The First District Court of Appeals in Illinois held that book-out transactions, in which there is no physical delivery of fuel and fuel inventories do not change, are transfers of ownership of fuel and are subject to tax under the Cook County Retail Sale of Gasoline and Diesel Tax Ordinance. The case, Marathon Petroleum Co. LP v. Cook County Department of Revenue, Ill. App. Ct. 1st Dist., No. 1-21-0635, (December 30, 2022) was an appeal from the Circuit Court of Cook County, IL. Taxpayers buying and selling gasoline and diesel in Cook County, IL should consider that all transactions, whether or not there is a movement of the fuel or a change in the physical custody, are likely to fall within the Cook County Fuel Tax Ordinance.
Podcast: Understanding Direct Pay Permits and Their Tax Benefits
Direct pay permits, which allow taxpayers to pay sales tax directly to the state rather than sellers, are becoming more common. Many businesses see direct pay as an essential element to the management of their state and local tax obligations, however there are still many questions.
A number of states have updated their motor fuel tax rates and related fees effective in the first quarter of 2023. Weaver will monitor these actions and update this post regularly throughout the quarter.
